lAY  13  '91S 


A  BRIEF  HISTORY 


OF 


TELEPHONE  ACCOUNTING 


A    LECTURE    DELIVERED    TO    THE  STUDENTS  OF 

THE   AMOS  TUCK  SCHOOL  OF    ADMINISTRATION 

AND    FINANCE,  ASSOCIATED    WITH    DARTMOUTH 

COLLEGE,  HANOVER,  N.  H. 


BY 


CHARLES  G.  DuBOIS 

Comptroller  of  American  Telephone  and  Telegraph  Company 


FEBRUARY    10,    1913 


A  BRIEF  HISTORY 

OF 

TELEPHONE  ACCOUNTING 


A    LECTURE    DEUVERED    TO    THE  STUDENTS  OF 

THE   AMOS  TUCK  SCHOOL  OF    ADMINISTRATION 

AND    FINANCE,  ASSOCIATED    WITH    DARTMOUTH 

COLLEGE,  HANOVER,  N.  H. 


BY 


CHARLES  a  puBOIS 

Comptroller  of  American  Telephone  and  Telegraph  Company 


FEBRUARY    10,    1913 


^ 


CONTENTS. 
I.     Introduction.  ^ 

II.     Early  Development  of  Telephone  Accounts. 

1)  Prior  to  1883. 

2)  First  Work  on  Accounting  System. 

3)  Circulars  of  1887,  1891  and  1904. 

III.  The  Period  1907  -  1912. 

1)     Characteristic  Features  of  the  Business  and  Their 
Effect  on  the  Accounting. 

a)  A  National  System. 

b)  Reorganization    into    Fewer    and    Larger 
....          ,    .  .  ,    .  Units. 

':  '.**       .c).*   ^^i^gs^  in   Type  of  Operating  Organiza- 
.   •..•.♦•.'.'•'•     ;  tion'9, 
/•*.. '2)  .-'A'dmimsttative -Accounting  and  Its  Importance. 

3)  Publicity  of  Accounts. 

a)  Publicity  from  the  Standpoint  of  the  Pub- 

lic generally. 

b)  Publicity    and  Investment. 

4)  Commission  Regulation  of  Accounts. 

5)  Development  of  Accounting  Practice  1907-1912. 

a)  Procedure  to   Develop  Uniform  Accounts 

and  Standard  Reports. 

b)  Plant  and  Maintenance  Accounting. 

c)  Segregation  of  Exchange  and  Toll  Systems. 

d)  Departmental  Expenditures. 

e)  Form  of  Accounts  for  General  Publication. 

IV.  The  Period  of  Accounting  under  Federal  Regulation. 

1)  Authority  of  the  Commission. 

2)  What  the  Commission  Has  Done. 

a)  Balance  Sheet  Statement. 

b)  Income  Account. 

c)  Corporate  Surplus  or  Deficit  Account. 

d)  Operating  Revenue  Accounts. 

e)  Operating  Expense  Accounts. 

f)  Clearing  Accounts. 

V.     Conclusion. 
VI.     Appendices. 


A  BRIEF  HISTORY  OF  TELEPHONE  ACCOUNTING 


I.     INTRODUCTION. 

We  can  only  get  a  proper  perspective  of  the  various 
phases  of  the  telephone  business  by  first  grasping  the  thought 
that  the  invention  itself  was  made  only  thirty-six  years  ago, 
that  for  the  first  twenty  years  its  history  was  one  of  ex- 
periment and  development  and  that  only  for  ten  or  fifteen 
years  has  the  telephone  been  a  big  public  service  equipped  to 
fulfill  its  natural  functions  in  the  great  industrial  and  social 
reorganization  which  has  been  and  still  is  going  on  through- 
out this  nation  and  elsewhere. 

The  story  of  the  legal  and  financial  struggles  to  establish 
the  telephone  in  its  present  position  as  the  premier  public 
convenience  has  been  well  told  many  times  and  in  many 
places.  The  technical  development  of  the  telephone  instru- 
ments, of  the  apparatus  for  making  connections  through 
central  offices  and  of  the  wire  construction  necessary  to  con- 
nect telephones  and  switchboards — in  a  word,  the  engineering 
— has  a  considerable  literature  of  its  own. 

The  statistical  position  of  the  telephone  has  also  naturally 
received  much  attention.  For  the  United  States  it  has  been 
stated  in  fairly  definite  and  uniform  terms  from  the  beginning, 
not  only  in  the  annual  reports  of  the  American  Telephone 
and  Telegraph  Company  and  its  predecessor,  The  American 
Bell  Telephone  Company,  but  also  in  special  census  reports 
of  1902  and  1907  (with  another  for  1912  now  in  preparation)  ; 
and  for  the  entire  world  the  statistical  position  for  the  ten 
years  1902-1912  has  been  set  forth  in  the  booklet  entitled 
"Telephone  Statistics  of  the  World"  prepared  and  distributed 
by  the  Statistician  of  the  American  Telephone  and  Telegraph 
Company.  To  get  the  present  statistical  position  in  our  minds 
it  may  here  be  said  that  starting  from  nothing  in  1876  there 

3 

259333 


are  to-day  in  the  United  States  nearly  9,000,000  telephones 
connected  together  by  about  18,000,000  miles  of  wire  and 
representing  an  investment  of  more  than  a  billion  dollars. 

Other  civilized  countries  have  followed  the  lead  of  the 
United  States  and  though  nowhere  else  is  there  such  a  com- 
mon and  universal  use  of  this  public  convenience  there  are 
about  5,000,000  telephones  in  all  other  countries  combined. 
The  grand  total  for  the  world  of  about  14,000,000  telephones 
and  30,000,000  miles  of  wire  representing  an  investment  of 
about  $1,800,000,000  shows  to  what  proportions  the  industry 
has  come  in  only  thirty-six  years. 

While  so  much  has  been  written  about  the  legal,  technical, 
commercial  and  statistical  features  of  this  rapid  and  tremen- 
dous expansion,  no  general  survey  of  the  rise  and  development 
of  the  accounting  methods  followed  in  this  industry  has  been 
attempted  heretofore.  In  the  following  pages  my  attempt  to 
do  this  has  no  pretension  as  a  formal  historical  study  and 
while  it  brings  together  in  some  chronological  order  the  main 
points  in  the  development  of  telephone  accounting  its  em- 
phasis is  more  particularly  on  the  character  and  growth  of 
the  relations  of  the  accounts  to  the  industry  itself  and  to  the 
public  it  serves. 


II.     EARLY   DEVELOPMENT   OF   TELEPHONE 
ACCOUNTS. 

1)     Prior  to  1883. 

From  the  organization  of  the  American  Bell  Com- 
pany in  May,  1880,  its  accounts  were  kept  with  the  scrupu- 
lous care  and  fidelity  characteristic  of  the  old  time  Boston 
merchant.  The  printed  annual  report  of  the  company 
for  its  first  year  contained  evidence  of  conservatism — 
unusual  in  newly  organized  corporations — in  the  follow- 
ing statement  of  the  President : 

"Much  of  the  electrical  and  legal  work  of  these 
"first  years  of  the  company,  and  indeed  some  of  our 
"expenses  incurred  in  studying  and  classifying  the 
"business,  are  substantially  for  the  establishment  of 
"the  property,  and  might  be  charged  to  construction 


"and  capitalized,  but  the  directors  have  preferred  the 
"more  conservative  policy  of  charging  everything  to 
"operating  which  could  reasonably  be  put  there, 
"although  the  result  upon  the  books  appears  less 
"favorable,  in  consequence,  than  the  business  pros- 
"pects  might  warrant  us  in  exhibiting." 

A  complete  earnings  statement  and  a  cash  statement 
were  shown  in  this  first  report  attested  by  the  certificate 
of  a  public  auditor  and  in  the  following  year  a  proper 
balance  sheet  was  given. 

The  American  Bell  Company  as  the  owner  of  the 
Bell  patents  at  first  licensed  telephone  instruments  mostly 
to  individuals  for  use  on  private  lines.  As  exchanges 
came  to  be  established  a  new  class  of  licensees  appeared, 
generally  firms  or  small  corporations,  who  undertook  to 
build  and  operate  an  exchange  for  a  small  territory  like 
a  county  or  a  city.  In  these  small  companies  the  Ameri- 
can Bell  Company  usually  took  a  part  ownership,  but 
prior  to  1883  gave  little,  if  any,  consideration  or  super- 
vision to  their  accounting  practices  except  that  they  were 
as  licensees,  required  to  keep  strict  record  of  and  make 
reports  and  payments  for  the  instruments  licensed  to  them. 

In  1883  the  American  Bell  Telephone  Company  ap- 
pointed an  Auditor*,  who  took  up  the  study  of  accounting 
methods  in  these  operating  companies  and  the  examina- 
tion of  their  accounting  results. 

At  this  time  the  number  of  telephone  subscribers  or 
stations  numbered  about  100,000  and  with  the  construc- 
tion of  connecting  lines  between  the  different  licensees, 
which  was  then  in  progress,  the  toll  and  extra-territorial 
business  was  becoming  a  more  important  feature  of  the 
business.  The  execution  of  permanent,  in  place  of  tem- 
porary contracts,  between  the  American  Bell  and  most 
of  the  licensed  companies  had  tended  to  bring  those  com- 
panies into  closer  relations  and  to  promote  interests  in 
common.  While,  to  5ome  extent,  uniform  methods  of 
construction  and  standard  types  of  apparatus  were  already 


^General  Thomas  Sherwin,  who  continued  in  that  position  until 
July  1907. 


in  use,  and  were  becoming  more  generally  adopted,  it 
seemed  important  that,  with  the  growth  of  the  business, 
a  system  of  accounting  as  nearly  uniform  as  conditions 
warranted  should,  alike  in  the  interest  of  the  operating 
companies  and  the  American  Company,  be  agreed  upon 
and  put  in  practice. 

2)     First  Work  on  Accounting  System. 

In  the  early  part  of  1883  the  companies  were  re- 
quested to  send  in  monthly  Trial  Balances  showing  the 
balances  of  their  ledger  accounts  at  the  close  of  each 
month.  A  form  was  printed  on  which  the  information 
requested  included  also  a  "General  Statement  of  Business 
for  the  Month."  These  forms  with  many  changes  and 
amplifications  conforming  to  the  developments  and  refine- 
ments in  the  accounting  as  subsequently  improved  were 
continued  up  to  December  31,  1907.  The  compilation  by 
the  companies  and  the  later  receipt  of  these  forms  at 
Boston  was  very  slow  and,  as  a  rule,  they  were  not 
available  until  nearly  two  months  after  the  close  of  the 
month  which  they  represented. 

A  study  of  the  accounts  of  most  of  the  companies 
during  the  year  1883  showed  great  diversity  in  the 
methods  employed  and  in  the  care  given  to  the  work  so 
that  while  some  of  the  reports  were  made  by  competent 
bookkeepers,  others  were  almost  worthless. 

As  a  result  of  this  study  the  first  circular  on  telephone 
accounts  was  sent  out  by  the  American  Bell  Company  on 
April  25,  1884. 

Although  accounting  in  the  business  and  industrial 
concerns  of  America  had  generally  received  but  scant 
attention  at  this  time  some  of  the  points  made  in  this 
circular  of  1884  are  well  worth  noting.  For  instance, 
Reconstruction  is  specified  to  be  an  expense  and  defined 
as  "that  portion  of  the  cost  of  rebuilding  or  replacing 
property  not  properly  chargeable  to  Construction."  "Un- 
earned rental"  is  recognized  as  a  liability.  "Construction" 
it  is  stated,  "should  represent  the  value  of  the  plant  and 
may  properly  be  subdivided  according  to  the  service  to 
which  the  property  is  applied."     Depreciation  is  clearly 


recognized  and  10%  is  suggested  as  the  usual  estimated 
annual  rate,  while  a  reserve  fund  is  recommended  to  be 
set  up  to  which  should  be  added  "the  estimated  amount 
of  yearly  depreciation  not  covered  by  the  expenditure  for 
Repairs  and  Reconstruction." 

3)     Circulars  of  1887,  1891  and  1904. 

Further  circulars  were  issued,  one  on  December  30, 
1887,  dealing  with  the  sub-divisions  of  Expense  recom- 
mended, and  another  on  January  1,  1891,  amplifying  and 
bringing  up  to  date  the  entire  scheme  of  accounts. 

In  this  circular  a  change  was  made  which  in  the  light 
of  subsequent  history  I  can  only  regard  as  a  step  back- 
ward, in  that  the  separation  as  between  Current  Main- 
tenance and  Reconstruction  was  abandoned.  It  is  prob- 
able that  this  was  done  because  the  field  work  was  not 
at  that  early  date  systematized  to  the  point  of  making  the 
distinction  carefully.  Nevertheless  the  circular  of  1891 
as  a  whole  marks  a  distinct  advance  because  it  presented 
a  complete  accounting  system  with  definitions  and  num- 
bers for  accounts,  advice  as  to  the  books  to  be  kept,  and  a 
plan  of  apportionment  of  general  expenses. 

In  that  early  day  it  was  quite  commonly  believed  that 
all  expenses  should  be  distributed  or  apportioned  to  the 
separate  exchanges.  This  idea  is  maintained  by  many 
small  companies  to  this  day,  though  the  larger  companies 
of  the  Bell  System  have  either  abandoned  it  entirely  or 
changed  its  character  by  applying  it  to  districts  or  divi- 
sions comprising  several  exchanges.  The  evolution  of 
administrative  organization  and  the  ideal  of  universal 
service  have  both  worked  in  this  direction. 

During  1902  and  1903  there  was  considerable  agita- 
tion and  experimentation  relative  to  the  separation  of 
Exchange  and  Toll  Expenses,  but  after  much  study,  cor- 
respondence and  conference  on  the  subject,  this  separation 
was  eventually  abandoned  because  the  nature  of  the  busi- 
ness and  the  use  of  the  plant  involved  made  any  attempt 
at  a  segregation  of  the  expenses  too  much  of  a  guess  to 
be  of  any  practical  value.  Subsequent  experience  has 
confirmed  the  wisdom  of  this  decision. 


By  1903  the  telephone  business  of  the  country  had 
developed  to  a  point  where  it  became  evident  that  a 
further  revision  and  amplification  of  the  accounting  sys- 
tem was  necessary.  It  was  difficult,  in  some  cases  impos- 
sible, to  obtain  from  the  books  of  the  operating  companies 
any  trustworthy  data  to  determine  the  average  life  of 
the  several  classes  of  plant,  and  consequently  it  was 
almost  impossible  to  find  two  engineers  or  accountants 
who  agreed  upon  the  percentages  which  should  be  allowed 
for  deterioration  or  obsolescence. 

After  many  consultations  with  engineers  and  with 
public  as  well  as  telephone  accountants,  the  circular  of 
January  1,  1904,  was  issued  by  the  American  Bell  Tele- 
phone Company.  Besides  the  additional  subdivisions  of 
plant  accounts  provided  for  by  this  circular  the  separation 
of  Current  Maintenance  and  Reconstruction  was  again 
established,  but  owing  chiefly  to  the  lack  of  uniform  or 
adequate  clerical  methods  in  the  field,  the  figures  reported 
by  many  of  the  companies  varied  so  greatly  that  the  plan 
was  not  completely  successful. 

III.     THE  PERIOD  1907-1912. 

1)     Characteristic  Features  of  the  Business  and  Their  Effect 
on  the  Accounting. 

I  distinguish  the  period  beginning  with  1907  because 
in  that  year  and  continuing  in  the  five  years  following 
certain  important  developments  occurred  in  the  telephone 
business  which  greatly  influenced  the  accounting  pro- 
cedure. 

a)     A  National  System. 

In  the  first  place  the  conception  of  a  national 
telephone  system  which  had  been  in  the  minds  of 
some  Bell  officials  from  the  beginning  took  a  firm 
hold  on  the  imagination  of  the  public  as  a  desirable 
plan  if  it  could  be  brought  about  under  suitable  public 
regulations  as  to  service  and  rates.  Obviously  the 
Bell  System  had  then  the  framework  for  such  a  na- 

8 


tional  system  and  the  Bell  management  promptly  rose 
to  the  occasion.  In  working  on  the  problem  from  this 
point  of  view  it  was  necessary  to  have  accounts  and 
statistics  of  the  system  as  a  whole,  for  no  one  could 
get  a  clear  and  comprehensive  view  of  the  situation 
from  the  figures  of  the  thirty-five  separate  companies 
which  made  up  the  rather  loosely-joined  Bell  organi- 
zation of  six  years  ago. 

Uniformity  of  accounting  thus  became  not  merely 
desirable  but  necessary. 

Consolidated  reports  became  possible  as  soon  as 
uniformity  of  accounting  was  attained  and  by  elimi- 
nating the  inter-company  items — that  is,  the  items 
which  were  liabilities  of  one  company  and  assets  of 
another  or  earnings  of  one  company  received  from 
another  within  the  system — a  picture  of  the  condition 
of  the  Bell  System  as  a  whole  in  its  relation  to  its 
stockholders  and  to  the  public  was  obtained. 

b)     Reorganization  Into  Fewer  and  Larger  Units. 

Another  step  toward  knitting  the  System  to- 
gether more  firmly  was  the  exchange  of  the  parent 
company's  stock  for  the  stocks  in  several  subsidiary 
companies,  so  that  the  thirty-five  companies  could  be 
more  effectively  organized  for  the  commercial  neces- 
sities of  the  service  and  without  disturbing  the  rights 
of  previous  stockholders  in  those  companies. 

These  rearrangements  of  territory  resulted  in 
the  eight  large  territorial  divisions  of  the  Bell  System 
operated  to-day  and  called  from  their  geographical 
location,  New  England,  Eastern,  Southern,  Central, 
Southwestern,  Northwestern,  Mountain  and  Pacific. 
In  general,  each  division  has  one  set  of  officers,  al- 
though a  division  may  comprise  several  companies. 

The  principal  effect  of  this  reorganization  on  the 
accounts  was  that  they  gradually  became  centralized 
at  the  eight  division  headquarters,  thereby  increasing 
the  accuracy  and  decreasing  the  number  of  reports. 
It  also  tended  to  simplify  the  consolidation  of  reports 
at  the  parent  company's  headquarters. 


c)     Change  in  Type  of  Operating  Organizations. 

Coincident  with  the  reorganization  into  fewer 
and  larger  units  a  general  type  of  operating  organiza- 
tion called  "functional"  or  departmental,  very  rapidly 
came  to  be  predominant,  where  previously  the  "ter- 
ritorial" type  of  organization  had  existed  in  large 
areas  of  the  country.  The  difference  between  the  two 
must  be  briefly  mentioned  and  in  very  general  terms.* 

The  "territorial"  plan  as  applied  to  the  telephone 
business  means  that  each  locality  has  its  telephone 
manager  who  has  authority  and  responsibility  for  all 
the  company's  operations  for  that  locality,  including 
the  maintenance  of  plant,  the  giving  of  service,  get- 
ting new  subscribers,  rendering  bills,  receiving 
money,  etc.  These  local  managers  in  turn  may  re- 
port to  a  division  manager  and  he  to  a  general  man- 
ager who  would,  in  theory,  know  all  about  all  parts 
of  the  business.  In  practice,  the  general  manager  of 
a  large  company  under  this  organization  must  have 
various  assistants  whose  relations  to  the  division 
managers  are  mostly  advisory  and  who  from  the 
nature  and  complexity  of  the  business  tend  to  become 
particularly  qualified  on  some  one  function,  one 
specializing  on  the  construction  of  the  plant,  another 
familiarizing  himself  with  traffic  methods,  and  per- 
haps a  third  dealing  with  the  public  and  with  public 
authorities. 

The  so-called  "functional"  organization  is  the 
natural  evolution  from  a  large  territorial  organiza- 
tion, but  it  is  distinctive  in  that  it  gives  these  special- 
ized assistants  full  authority  all  the  way  down  the 
line.  Thus  the  Plant,  Traffic  and  Commercial  De- 
partments work  co-ordinately  all  through  the  terri- 
tory. The  Accounting,  Treasury  and  Legal  Depart- 
ments, whose  work  is  mostly  at  headquarters,  have 


*For  a  discussion  of  these  two  types  of  organization  as  applied 
to  Railways  see   Railroad  Administration  by  Ray  Morris,  p.  76. 

See  also  Applications  of  Some   General   Principles  of  Organiza- 
tion,  A.    T.    &   T.    Co.,    1909. 

10 


nevertheless  full  authority  as  to  what  must  be  done 
in  the  territory  to  meet  their  respective  needs. 

The  spreading  of  the  functional  organization 
plan  has  greatly  increased  the  effective  use  of  the 
accounts,  and  I  think  this  is  because  specialists  gen- 
erally tend  to  base  their  judgments  on  exact  data  so 
far  as  possible  rather  than  to  rely  on  intuition  or 
guess  work. 

The  form  of  accounts  is  also  affected  by  the 
form  of  organization.  This  is  particularly  true  as  to 
sub-divisions  of  expense  accounts,  for  in  the  functional 
organization  the  expenditures  of  each  department  are 
a  direct  responsibility  of  that  department.  The 
efficiency  of  each  department  head  being  gauged  by 
weighing  the  service  rendered  by  his  department 
against  the  expense  incurred,  he  in  turn  gauges  the 
efficiency  of  his  divisional  and  local  subordinates  in 
the  same  way. 

Thus  the  accounting  records  of  expenditures  go 
further  down  the  line  and  become  one  of  the  useful 
tools  of  the  operating  man. 

An  interesting  development  of  this  was  the  ten- 
dency to  perform  the  subsidiary  accounting  work  in 
the  principal  departments  concerned  so  that  the  form 
and  arrangement  of  data  would  be  more  flexible  and 
the  figures  be  more  quickly  obtained.  The  results  of 
this  subsidiary  accounting  go  forward,  of  course,  to 
the  chief  accounting  officer  of  a  company  and  subject 
to  his  concurrence,  or  after  such  audit  as  he  may 
think  necessary,  is  by  him  entered  on  the  company's 
books. 

2)     Administrative  Accounting  and  Its  Importance. 

I  count  the  growing  use  of  accounts  by  administra- 
tive officers  as  the  most  important  development  in  tele- 
phone accounting  during  the  past  six  years.  I  believe 
that  the  old  criticism  of  accounts  as  a  sacred  mystery  re- 
vealed only  to  a  few  higher  officials  has  in  the  telephone 
service  forever  passed  away  and  that  the  possibilities  in 
accounts  as  working  tools  are  at  last  coming  to  be  re- 
alized. 


11 


The  practical  use  of  accounts  and  accounting  data  by- 
administrative  officers  exerts  a  continued  pressure  to  keep 
the  accounting  methods  in  a  process  of  development  as 
the  business  develops.  Without  such  practical  use  the 
tendency  is  for  accounts  to  become  rigid,  formal  and  per- 
functory. But  wherever  the  demand  for  practical  use  is 
strong  enough  the  accounting  officers  are  bound  to  re- 
ceive almost  continuously  constructi^^  criticism  and  sug- 
gestion from  the  administrative  officers.  This  is  the 
breath  of  life  to  an  accounting  system. 

3)     Publicity  of  Accounts. 

An  event  almost  equal  in  importance  to  the  develop- 
ment of  administrative  accounting  in  this  period  was  the 
publicity  of  telephone  accounts. 

The  American  Telephone  and  Telegraph  Company 
(and  its  predecessor,  The  American  Bell  Telephone  Com- 
pany) and  some  of  the  operating  Bell  Companies  had 
from  the  beginning  published  annual  figures  of  their  own 
results,  but  not  until  1908  was  a  statement  published 
showing  the  earnings  of  the  Bell  System  as  a  whole.  In 
the  following  year  combined  and  comparative  Balance 
Sheets  were  published.  A  little  later  the  publication  of 
quarterly  figures  both  of  the  parent  company  and  of  the 
Bell  System  was  started,  which  practice  is  still  followed 
and  is  likely  to  continue. 

a)     Publicity   from  the    Standpoint   of  the   Public   Gen- 
erally. 

Publicity  of  accounts  and  knowledge  as  to  the 
plans  and  policy  of  public  utility  corporations  is  right- 
fully demanded  by  public  sentiment.  Public  opinion 
really  determines  the  methods  and  practices  under 
which  business  is  to  be  conducted.  No  business 
comes  into  such  close  personal  relations  with  the 
public  generally  as  the  telephone  service  and  it  was 
appropriate  that  the  telephone  should  be  one  of  the 
first  great  utilities  to  take  the  public  into  its  confi- 
dence as  to  its  accounting  results  and  its  general 
policy. 

12 


Without  general  public  confidence  any  public 
utility  is  in  a  precarious  situation.  One  is  apt  to 
think  of  the  public  simply  as  an  electorate  having 
periodical  opportunity  to  express  itself  by  a  majority 
vote  for  or  against  a  man  or  a  measure.  This  is  not 
the  v^hole  case.  The  public,  as  I  see  it  in  its  relations 
to  the  public  utility,  is  peculiarly  individualistic. 
There  is  a  dim  sentiment  pervading  most  men's 
minds  that  the  utility  can  take  care  of  itself  and  that 
therefore  its  various  actions  are  to  be  viewed  critically 
or  even  suspiciously.  There  is  also  a  general  senti- 
ment that  the  utility  should  be  allowed  to  earn  a  fair 
return  on  its  bona  fide  investment  provided  it  gives 
good  service.  Beyond  some  such  general  sentiments 
each  individual  seems  to  shape  his  attitude  toward 
each  public  utility  with  which  he  comes  in  contact 
from  his  own  occasional  experience.  It  is  then  the 
problem  of  the  public  utility  through  all  its  em- 
ployees to  meet  the  needs  or  wishes  of  each  indi- 
vidual and  at  the  same  time  conform  to  certain 
definite  policies,  methods  and  practices  without  which 
the  utility  can  not  remain  a  coherent  organization. 

Of  course,  considering  the  multitude  and  va- 
riety of  transactions  and  of  individuals,  complete 
satisfaction  to  both  parties  in  every  instance  is  not  to 
be  expected.  With  the  best  of  efforts  and  intentions 
complaints  must  arise.  The  utility  should  be  quick 
to  explain  the  matter  intelligently  if  it  is  not  at  fault 
and  equally  quick  to  admit  and  make  reparation  if 
possible  when  it  is  at  fault.  This  practice  will  turn 
many  a  belligerent  into  a  friend. 

But  the  complaints  that  are  presented  to  the 
utility  or  to  a  Commission  having  regulatory  powers 
over  it  are  of  minor  importance  as  compared  with  the 
unspoken  attitude  of  mind  of  that  vast  majority  of 
the  public  which  says  nothing  and  does  nothing  till 
a  test  comes. 

When  the  test  comes  it  is  found  that  each  utility 
has  its  own  distinctive  reputation,  and  all  the  facts 
in  a  specific  case  are  seen  in  the  light  of  that  reputa- 


13 


tion,  precisely  as  they  are  in  the  case  of  an  individual. 

Good  reputation  is  as  essential  then  to  a  public 
utility  as  to  an  individual.  It  can  be  obtained,  too. 
like  the  individual's  good  reputation,  only  by  years 
of  honest  and  efficient  labor. 

Moreover,  honesty  and  efficiency  are  not  of  them- 
selves sufficient  to  secure  public  confidence.  People 
must  be  kept  informed  and  th^information  must 
be  presented  so  attractively  and  so  interestingly  that 
they  will  absorb  it.  There  are  many  ways  of  doing 
this,  but  in  the  last  analysis  nothing  takes  the  place 
of  that  "deadly  logic  of  the  balance-sheet."  What 
is  the  value  of  this  utility's  property?  How  much 
does  it  charge  for  its  services?  Do  the  stockholders 
get  as  much  as  or  more  than  they  are  entitled  to? 
The  answers  to  such  questions  are  vital  in  forming 
public  opinion  and  the  right  answers  can  come  only 
through  well-kept  and  properly  expressed  accounts. 

b)     Publicity  and  Investment. 

Another  phase  of  publicity  is  its  effect  on  pres- 
ent and  possible  future  investors. 

During  the  past  few  years  the  security  markets 
have  been  changing  their  character  of  business. 
Speculation  is  decreasing,  at  least  relatively,  and  I 
think  quantitatively.  Careful  investment  is  increas- 
ing and  intelligent  investment  depends  on  knowledge. 
The  growth  in  numbers  of  small  individual  investors 
in  the  securities  of  our  principal  corporations  has 
become  very  rapid. 

The  following  quotation  from  the  financial  col- 
umns of  the  New  York  Evening  Sun  (February  3, 
1913)  illustrates  the  Wall  Street  view  of  this : 

"The  investing  public  throughout  the  coun- 
try *  *  *  ig  ^gu  aware  that  for  a  period  of 
about  five  years  there  has  been  a  constant  multi- 
plication of  the  facilities  for  small  investors,  that 
commission  houses  which  formerly  discouraged 
anything  but  100  share  units  of  operation  cheer- 

14 


fully  accept  orders  for  ten  and  twenty  share  lots ; 
that  the  number  of  houses  catering  particularly 
to  the  small  investor  and  making  no  difficulty 
about  getting  him  ten  or  twenty  or  fifty  shares 
at  as  good  a  price  as  100  shares  could  be  bought 
for  some  one  else  has  greatly  increased,  and  that 
practically  everywhere  in  Wall  Street  the  small 
investor  is  welcomed  with  open  arms." 
The  American  Telephone  and  Telegraph  Com- 
pany, which  had  18,000  shareholders  five  years  ago, 
to-day  has  over  50,000,  of  whom  about  44,000  hold 
less  than  100  shares  each.    A  similar  comparison  can 
be  made  of  other  important  corporations.     Nothing 
but  the  growing  confidence  of  small   investors  can 
have  caused  this  spreading  out  of  ownership  and  that 
confidence  is  primarily  dependent  on  the  accounting 
results  which  are  furnished  them. 

Capital  is  traditionally  timid.  It  will  not  flow 
into  anything  hazardous  without  an  expectation  of 
large  returns.  The  business  of  public  utilities  is  not 
naturally  hazardous  and  even  the  hazards  of  their 
present  public  status  can  be  largely  removed  by  a 
settled  public  policy  toward  them  and  a  just  and 
efficient   regulation. 

The  appeal  for  capital  for  public  utilities  should 
be  chiefly  to  small  but  permanent  investors,  and 
should  be  on  the  ground  that  the  property  is  a  safe 
and  well-protected  investment.  Permanent  investors 
pay  little  attention  to  rumors  about  the  business  or 
to  market  fluctuations,  but  they  follow  closely  the 
regular  reports  of  earnings,  property  and  capitaliza- 
tion. 


4)     Commission  Regulation  of  Accounts. 

We  come  now  to  the  part  that  accounting  has  in  the 
increasing  control  by  the  people,  through  governmental 
agencies,  of  the  large  corporations  and  particularly  those 
classed  as  public  utilities. 


There  are  some  advocates  for  all  possible  methods  of 
conducting  these  public  utilities.  Competition,  co-opera- 
tion, combination,  monopoly,  public  regulation,  public 
ownership,  even  state  socialism,  are  discussed  as  theories. 

So  far  as  my  personal  views  are  concerned,  this  seems 
to  me  not  a  matter  of  theory  at  all,  but  wholly  a  matter 
of  the  most  efficient  plan  now  for  a  particular  service. 
What  will  work  best  here  and  now  is  the  real  question, 
and,  in  fact,  that  is  the  basis  on  which  the  question  has  to 
get  its  practical  answer. 

Though  no  one  solution  of  the  whole  problem  could 
be  generally  accepted,  yet  as  to  the  telephone  service  ex- 
isting to-day  some  general  conclusions  seem  to  have  been 
reached. 

In  the  first  place,  the  telephone  business  might  likely 
not  have  developed  at  all  had  it  not  enjoyed  at  the  start 
its  patent  monopoly,  but  it  has  long  since  definitely 
passed  out  of  the  monopoly  period  and  is  now  under  a 
regime  of  public  control  and  regulation. 

In  the  next  place,  it  seems  clear  that  the  duplication 
of  telephone  service,  incorrectly  called  competition,  which 
still  exists  in  a  few  parts  of  the  country  is  doomed,  for 
the  simple  reason  that  people  will  not  bother  with  nor  pay 
for  two  telephones  to  do  the  work  of  one ;  their  perfectly 
reasonable  demand  being  that  they  should  be  able  to  reach 
everybody  from  the  one  telephone. 

It  does  not  seem  to  me  that  general  monopoly  of 
ownership  is  necessarily  the  only  way  for  meeting  this 
public  need.  The  principal  of  co-operation  can  be  and  is 
followed  in  a  high  degree  in  the  telephone  service.  There 
are,  for  instance,  about  5,000  exchanges  owned  by  the 
Bell  System  and  there  are  12,000  small  exchanges  not 
owned  nor  operated  by  the  Bell  System  but  connecting 
to  it  for  exchanging  toll  service. 

This  works  admirably  so  long  as  the  whole  forms 
one  general  comprehensive  system  and  is  sufficiently  un- 
der one  policy  so  as  to  give  an  efficient  and  universal 
service. 

The  Bell  Telephone  management  long  ago  realized 


16 


that  the  Bell  System  should  be  national  in  its  scope  and 
facilities,  and  that  the  corollary  of  this  proposition  was 
that  it  should  not  merely  submit  to  but  should  welcome 
public  regulation  of  its  business  on  any  reasonable  lines, — 
meaning  by  ''reasonable  lines"  those  that  would  foster 
and  develop  the  service  and  attract  capital  for  that  pur- 
pose. 

In  his  report  for  1910  the  President  of  American 
Telephone  and  Telegraph  Company  said:  "Public  con- 
trol or  regulation  of  Public  Service  Corporations  by  per- 
manent commissions,  has  come  and  come  to  stay." 

We  find  that  in  the  working  out  of  details  by  these 
commissions  great  stress  is  laid  on  the  methods  of  ac- 
counting to  be  followed. 

The  commissions  of  several  states,  notably  Wiscon- 
sin and  New  York,  have  in  the  past  few  years  adopted 
and  prescribed  complete  accounting  methods  for  tele- 
phone companies. 

With  these  exceptions,  however,  the  accounting 
methods  prescribed  by  states  have  been  simple  and  rather 
inconclusive,  the  general  idea  being  to  let  the  Interstate 
Commerce  Commission  develop  a  complete  accounting 
system  and  then  for  the  states  to  follow  that  or  at  least 
to  use  it  as  the  basis  for  making  up  their  own  systems. 

5)     Development  of  Accounting  Practice  1907-1912. 

Before  passing  to  the  plan  of  accounts  prescribed  by 
the  Interstate  Commerce  Commission  and  under  which 
the  Bell  Companies  have  just  begun  to  keep  their  ac- 
counts, it  is  appropriate  to  consider  some  of  the  practical 
accounting  that  has  taken  shape  in  the  Bell  System  dur- 
ing the  past  six  years  under  the  stress  of  the  various 
forces  that  have  been  referred  to.  These  forces  may  be 
again  enumerated  as: 

1)  The  ideal  of  a  nation-wide  service  with  its  conse- 
quent demand  for  comprehensive  and  uniform 
accounting  on  a  nation-wide  basis. 

2)  The  demand  of  administrative  officers  that  the 
accounts  provide  them  with  working  tools,  in- 

17 


stead  of  being  limited  to  historical  summaries. 

3)  The  recognition  of  publicity  of  accounts  as  a 
means  to  public  confidence  and  the  enlistment 
of  new  capital. 

4)  The  regulation  of  the  telephone  business  by  state 
and  federal  governments. 

a)     Procedure  to  Develop  Uniform  Accoixnts  and  Stand- 
ard Reports. 

Uniform  accounting  is  not  accomplished  by 
merely  issuing  orders  to  that  effect,  even  though  such 
orders  have  the  force  of  law.  Not  only  must  the  titles 
of  the  accounts  be  established,  but  careful  detailed 
definitions  of  the  items  to  go  under  each  account 
must  be  stated.  Moreover,  since  the  telephone  serv- 
ice consists  literally  of  millions  of  small  transactions, 
complete  uniformity  can  only  be  attained  by  sys- 
tematizing the  whole  clerical  procedure  throughout 
the  country  and  particularly  among  the  field  forces, 
which  handle  the  detailed  transactions. 

It  cannot  be  said  that  this  latter  work  has  been 
entirely  completed  throughout  the  Bell  System,  but 
it  has  reached  a  stage  where  substantial  uniformity 
is  obtained  while  still  allowing  for  fast-disappearing 
differences  in  organization  and  methods,  as  well  as 
for  the  actual  and  necessary  differences  due  tc 
geographical  conditions. 

The  methods  of  clerical  procedure  as  standard- 
ized for  the  Bell  System  are  set  forth  in  some  thirty- 
three  printed  bulletins  on  standard  routines  accom- 
panied by  about  two  hundred  standard  forms. 

These  bulletins  cover  the  clerical  procedure  for 
estimates  for  construction,  vouchers,  tool  records, 
supplies,  time  records  and  payrolls,  service  bills  and 
ledgers,  telegrams  telephoned,  employees'  benefits 
and  other  subjects. 

Uniform  accounting  having  been  attained  to  a 
substantial  degree,  uniform  reports  can  be  made  up 

18 


and  such  reports  can  be  combined  and  comparisons 
set  up. 

The  forms  of  reports  underwent  some  radical 
changes  in  this  period.  For  years  previous  to  1908 
each  company  had  made  up  one  report  (known  as 
305)  in  size  19"x24"  and  giving  balance  sheet  and 
income  report,  various  statistics  and  unit  costs  to  the 
extent  of  earnings  and  expenses  per  station. 

No  comparisons  with  other  periods  were  shown. 
These  reports  could  not  be  filled  out  on  typewriters, 
as  they  were  on  heavy  paper  and  were  so  large  they 
had  to  be  folded  several  times  for  filing  purposes. 
In  revising  the  scheme  of  reports  the  following  prin- 
ciples were  followed: 

a)  Ordinary  business  letter  size  Sy/'xll"  was 
adopted  as  the  standard  for  reports,  and  bind- 
ing and  indexing  were  arranged  for. 

b)  Paper  thin  enough  for  manifolding  five  or  six 
copies,  yet  heavy  enough  so  print  would  not 
show  through,  was  adopted. 

c)  Separate  reports  were  provided  for  Balance 
Sheet,  Earnings,  Plant  Values,  Plant  Statistics, 
etc. 

d)  Comparisons  by  periods  were  shown.  Thus  as- 
sets and  liabilities  were  compared  with  the 
month  before  and  also  with  the  beginning  of  the 
year,  while  earnings  were  stated  for  the  month 
compared  with  the  previous  month  and  also  for 
the  elapsed  period  of  the  year  compared  with  the 
same  period  of  the  previous  year. 

e)  Unit  costs  and  comparative  percentages  were  de- 
veloped and  formulas  for  their  calculation  were 
shown  on  the  reports. 

Each  report  being  named  and  numbered,  the 
whole  set  of  reports  (nine  in  number  in  1912)  formed 
a  complete  statement  of  any  company. 

These  reports  were  not  only  used  by  the  officers 
of  the  reporting  company,  but  were  also  combined  on 
identical  forms  for  groups  of  companies  and  for  the 


19 


Bell  System  as  a  whole.  Various  comparisons  of 
results  by  companies  were  also  set  up  on  sheets  of 
the  same  size  so  that  the  whole  series,  numbered  and 
indexed,  forms  a  complete  monthly  report  of  the  op- 
erations of  the  Bell  System.  By  stipulating  a  date 
at  which  each  report  must  be  issued  and  by  sys- 
tematizing the  work  of  compilation  it  is  customary 
to  have  the  whole  completed  within  thirty  days  after 
the  period  covered. 

b)     Plant  and  Maintenance  Accounting. 

The  subdivisions  of  Plant  or  Construction  ac- 
count in  the  Bell  System  on  a  uniform  basis  date 
back  to  about  1891  and  the  changes  since  have  come 
as  a  natural  evolution  rather  than  through  the  ap- 
plication of  new  principles.  Besides  Real  Estate 
there  were  and  are  four  natural  main  classes  of  Tele- 
phone Plant,  viz :  Central  OfBce  Equipment,  Sub- 
scribers' Station  Equipment,  Exchange  Lines  and 
Toll  Lines.  The  several  subdivisions  of  each  need 
not  here  be  described  further  than  to  say  that  both 
Exchange  Lines  and  Toll  Lines  are  subdivided  into 
Pole  Lines,  Aerial  Cable,  Aerial  Wire,  Underground 
Conduit,  Underground  Cable,  Submarine  Cable  and 
Right  of  Way,  the  title  describing  concisely  the 
character  of  each  account.  The  importance  of  these 
distinctions  rests  chiefly  on  the  relative  cost  and  per- 
manence of  the  diflferent  types  of  construction  indi- 
cated and  the  determination  of  depreciation  charges. 
They  are  mentioned  here  as  essential  to  an  under- 
standing of  the  accounting  problems  of  maintenance 
which  we  will   now  consider. 

Maintenance  as  an  accounting  term  signifies  the 
expense  of  upkeep  of  the  plant  and  in  telephone  ac- 
counting practice  has  three  main  divisions,  viz :  Cur- 
rent Repairs,  Station  Removals  and  Depreciation. 

Current  Repairs  represent  roughly  the  expense 
incurred  in  keeping  the  plant  in  condition  for  service 
but  not  including  replacement  or  reconstruction. 

20 


About  the  subdivisions  of  Current  Repairs  a  con- 
troversy raged  for  several  years,  but  the  pressure  of 
administrative  officers  finally — in  1908 — overthrew 
the  old  classification  of  salaries  and  wages,  traveling, 
rent,  and  material,  and  new  subdivisions  were  estab- 
lished corresponding  to  the  classifications  of  plant. 
This  was  a  distinct  advance  in  accounting  for  admin- 
istrative purposes  because  it  made  possible  unit  costs 
and  hence  made  comparisons  of  maintenance 
efficiency  possible. 

Station  Removals  is  a  maintenance  expense  pe- 
culiar to  the  telephone  business,  and  necessary  for 
the  reason  that,  from  the  beginning,  it  has  been  the 
common  practice  for  telephone  companies  to  bear  the 
cost  of  installing  telephones  and  removing  them. 
These  removals  involve  not  only  the  direct  expense 
of  disconnecting  and  taking  out  the  telephone  instru- 
ment, but  also  a  loss  caused  by  abandonment  of  in- 
terior wiring  and  frequently  of  some  outside  wires. 
This  process  of  taking  out  telephones  goes  on  all  the 
time.  For  every  three  telephones  installed  about  two 
are  taken  out,  resulting  in  the  Bell  System  in  an  an- 
nual expense  of  $6,000,000  to  $7,000,000. 

Depreciation  is  the  part  of  maintenance  which 
for  obvious  reasons  has  been  the  most  difficult  to 
treat  properly,  and  it  is  perhaps  the  most  difficult 
problem  in  accounting  generally.  Our  main  difficul- 
ties fall  under  these  heads : 

a)  Educating  administrative  officials  and  the 
public  generally  to  the  idea  of  accounting  for 
depreciation  as  a  standard  and  regular  prac- 
tice. 

b)  Determining  what  depreciation  represents 
with  sufficient  precision  for  definitions  to  be 
used  in  accounting  practice.  This  involves 
the  entire  accounting  treatment  of  deprecia- 
tion, reconstruction,  replacements,  plant  re- 
moved, cost  of  removal  and  salvage. 

c)  Determining     Avhat     rates     of     depreciation 

21 


should  be  used  and  the  formulas  or  methods 
of  calculation. 

A  recent  writer  has  said  truly  that  the  deprecia- 
tion charge  has  had  three  successive  phases,  1)  im- 
proper, 2)  legitimate  and  3)  necessary.  There  are 
but  few  persons  now  who  contend  that  the  deprecia- 
tion charge  is  improper.  Of  late  years  it  has  been 
generally  regarded  by  administrative  officers  as  legiti- 
mate if  it  left  sufficient  earnings  to  pay  reasonable  or 
satisfactory  dividends.  Now  we  are  in  an  era  where 
the  depreciation  charge  is  generally  regarded  as 
necessary  and  it  is  fast  coming  under  the  most  en- 
lightened public  regulation  to  be  compulsory.  Be- 
fore it  was  regarded  as  necessary  and  before  it  was 
made  compulsory  by  any  commission  the  Bell  System 
had  not  only  accepted  the  idea,  but  had  also  success- 
fully applied  it  in  its  accounting  practice. 

In  an  early  stage  of  this  development  a  round 
sum  was  arbitrarily  assumed  as  sufficient  for  the 
whole  of  maintenance  and  any  unexpended  balance  of 
this  sum  was  carried  to  Reserve.  This  plan,  besides 
having  no  basis  of  fact,  was  frequently  in  an  awk- 
ward situation  through  the  excess  of  expenditure 
over  appropriation. 

An  improvement  on  this  was  the  assumption  of 
an  arbitrary  amount  per  station,  but  this  was  open 
though  in  less  degree  to  similar  criticisms. 

The  next  stage  was  the  separation  of  main- 
tenance into  Current  Repairs,  Station  Removals  and 
Depreciation  with  the  latter  still  assumed  on  a  rather 
arbitrary  basis. 

The  last  stage  was  the  attempt  to  determine  by 
engineering  methods  what  the  depreciation  charge 
ought  to  be,  and  this  led  to  what  I  think  may  be 
fairly  claimed  as  a  logical,  accurate  and  practical 
method  of  accounting  for  depreciation. 

Briefly,  the  method  is  this : 

Depreciation  was  defined  as  "the  estimated  loss 
in  value  of  the  plant  which,  in  spite  of  repairs,  is 


22 


constantly  accruing  by  reason  of  inadequacy,  obsoles- 
cence, decay,  or  gradual  deterioration  from  natural 
and  usual  causes.  Inadequacy  may  be  caused  by  ad- 
vances in  the  art  or  by  more  rapid  growth  than  was 
foreseen,   or   by   public    regulation."* 

This  charge  being  made  to  expenses,  was  cred- 
ited Reserve  for  Depreciation.  Then  as  old  plant  was 
removed  or  abandoned  for  any  of  the  causes  defined 
as  depreciation  it  was  taken  off  or  credited  the  asset 
account  Plant  at  the  sum  at  which  it  stood  charged 
therein.  At  the  same  time  the  same  amount  was 
charged  to  the  Reserve  for  Depreciation — which  had 
been  created  for  that  purpose — the  salvage  of  ma- 
terial less  the  cost  of  removal  being  credited  the  same 
Reserve. 

What  happened  then  with  respect  to  renewals, 
reconstruction  and  replacements?  From  the  stand- 
point of  our  accounts,  no  such  terms  described  any 
transactions,  and  for  this  reason: 

Any  new  plant,  whether  it  replaced  old  plant  or 
was  an  addition  to  the  existing  structure,  was  charged 
the  Plant  account  and  any  plant  taken  out  of  the  ex- 
isting structure  was  taken  off  the  Plant  account.  The 
physical  circumstance  and  the  accounting  record  of  it 
exactly  corresponded. 

Following  this  method,  the  only  difficulty  re- 
maining was  to  determine  the  amount  of  the  de- 
preciation charge.  The  attempt  was  and  is  to  base 
this  on  the  life  in  use.  There  is  available  some  data 
as  to  the  average  life  of  certain  classes  of  telephone 
plant  which  have  a  comparatively  short  life,  such  as 
switchboards,  poles  and  iron  wire.  On  underground 
conduit  and  copper  wire  there  is  not  much  to  go  by, 
and  we  have  to  trust  to  engineering  opinion.  But  as 
the  years  pass,  the  experience  is  being  tabulated  from 
the  accounts  and  in  time  we  shall  know  very  closel)^ 


*See   page   43   American  Telephone    &  Telegraph   Company  Ac- 
counting  Circular   No.   6   First   Revision. 

23 


what  average  life  can  be  expected  for  such  classes  of 
plant. 

The  life,  the  cost  of  removal  and  the  salvage  of 
each  class  of  plant  having  been  determined  by  ex- 
perience or  estimate,  the  resultant  percentages  to  be 
applied  annually  to  the  plant  accounts  can  be  easily 
worked  out.  ^As  now  commonly  estimated  they  run 
from  1.5%  on  hard  drawn  copper  wire  in  toll  lines  to 
12.5%  on  iron  wire  in  exchange  lines,  the  composite 
percentages  for  complete  plants  varying  from  5%  to 
7%  per  annum,  on  the  so-called  "straight-line^ 
method.  This  method,  which  is  at  present  followed 
by  the  Bell  System,  means  that  the  same  percentage 
applied  every  year  will,  without  interest,  provide  at 
the  estimated  time  of  retirement  an  amount  equal  to 
the  original  cost  of  plant  plus  cost  of  removal  less 
salvage  value. 

Another  method  of  calculation  known  as  the 
Sinking  Fund  method  is  occasionally  discussed,  but 
has  not  at  present  come  into  any  general  use.  (See 
Note.) 

c)     Segregation  of  Exchange  and  Toll  Systems. 

Reference  has  already  been  made  to  the  early  at- 
tempts to  segregate  the  property,  earnings  and 
expenses  of  each  exchange  and  similarly  to  keep  the 
property  and  net  earnings  for  a  toll  system  separate. 
The  question  is  one  on  which  telephone  accountants 
generally  differ  from  commissions  and  their  account- 
ants. A  few  commissions  have  ruled  that  telephone 
companies  must  so  separate  the  expenses,  leaving  it 
to  the  companies  to  find  out  how  to  do  it. 

As  to  separating  the  expenses  among  exchanges 
it  is  obvious  that  this  can  be  done  strictly  only  for 
the  local  expenses,  such  as  wages  of  operators  and 


Note. — In  a  recent  English  case,  the  sale  of  the  property  of  the 
National  Telephone  Company  to  the  British  Post  Office,  the  Sinking 
Fund  method  of  calculating  the  present  value  of  plant  was  rejected 
and  the  straight-line  method  was  followed.  See  The  Accountant 
Editorial,  Jan.  25,   1913. 

24 


certain  repairs.  But  the  greater  part  of  the  expenses, 
in  the  larger  companies  particularly,  cover  the  work 
done  by  district,  division  and  general  forces,  all  of 
which  must  be  arbitrarily  apportioned  if  figures  by 
exchanges  are  to  be  made  up. 

The  genesis  of  the  idea  that  such  figures  were 
necessary  seems  to  be  that  the  exchange  was  the 
original  unit,  a)  of  ownership,  b)  of  administration, 
and  c)  of  rate-making.  No  one  of  these  conditions 
prevails  to-day  in  the  Bell  System,  except  in  so  far  as 
local  authorities  have  jurisdiction  of  rates,  and  as 
State  Commissions  take  jurisdiction  they  naturally 
and  properly  tend  to  consider  all  rates  from  the 
state-wide  standpoint. 

To  the  manager  of  a  small  company  operating 
from  one  to  a  dozen  exchanges,  the  idea  of  segregat- 
ing figures  according  to  exchanges  seems  natural  and 
reasonable,  and  so  far  his  views  have  been  generally 
accepted  by  Commissions,  but  the  tendency  is  away 
from  this  idea,  as  is  illustrated  by  the  final  decision 
of  the  Interstate  Commerce  Commission  to  require 
plant  and  expenses  to  be  segregated  into  the  three 
classes : 

a)  Pertaining  solely  to  any  exchange  system. 

b)  Pertaining  solely  to  any  toll  system. 

c)  Common  to  two  or  more  exchange  or  toll 
systems.* 

When  it  becomes  apparent,  as  it  surely  will, 
that  nearly  all  plant  and  expenses  are  common  to 
both  exchange  and  toll  service  the  requirement  as  a 
regular  routine  accounting  method  will  probably  die 
a  natural  death. 

d)     Departmental  Expenditures. 

The  influence  of  administrative  needs  in  the  ac- 
counts was  particularly  marked  in  the  subdivision  of 


*Sec.   2   General    Instructions   Interstate    Commerce    Commission 
Order   of   December    10,    1912. 

25 


expenses  along  the  lines  of  functional  organization, 
to  the  end  that  every  department  head  might  know 
the  expenditures  for  which  he  was  held  responsible. 
This  has  already  been  described,  and  it  is  only  men- 
tioned here  because  it  is  another  point  on  which  the 
companies  and  the  commissions  have  found  it  hard  to 
reconcile  their  respective  viewpoints.  The  compro- 
mise effected  recognizes  to  a  considerable  extent  the 
functional  organization  commonly  followed  by  the 
companies,  and  permits  such  further  subdivisions  of 
the  main  accounts  as  are  desired.  By  making  these 
subdivisions  along  departmental  lines  the  Bell  Com- 
panies can  get,  though  rather  awkwardly,  what  the 
departmental   administrative  officers  need. 

e)     Form  of  Accounts  for  General  Publication. 

In  preparing  accounting  data  for  general  publica- 
tion the  great  object  to  be  sought  is  to  so  present  it 
that  people  will  read  it,  and,  reading,  will  really 
understand  its  significance. 

Simplicity,  then,  is  the  first  consideration,  and  to 
tell  the  whole  truth  in  a  simple  form  about  a  vast  and 
complicated  industry  is  no  easy  task. 

There  are  many  technical  distinctions  made  by 
accountants  which  are  more  or  less  advantageous  in  a 
thorough  analysis,  but  which  tend  to  confuse  the 
meaning  of  the  information  to  the  average  reader.  I 
will  refer  to  but  one  and  that  briefly,  viz.,  the  dis- 
tinction between  the  Statement  of  Income  and  the 
Report  of  Operating  Revenues.  It  is  true  that  the 
latter  is  but  a  part  of  the  former,  but  to  answer  the 
two  most  natural  questions  about  a  company's  re- 
sults, "How  much  was  earned  for  dividends?"  and 
"How  much  was  charged  for  Depreciation?"  one 
would  have  to  refer  to  both  statements. 

For  general  use  the  two  should  be  combined  and 
experience  shows  that  the  simple  form,  comprising 
only  eleven  lines,  in  which  the  Bell  System's  earn- 

26 


ings  are  reported,  usually  gives  all  the  information 
wanted. 


These  various  needs  and  forces  were  what  shaped  the  ac- 
counting of  the  Bell  Telephone  System  up  to  the  end  of  the 
year  1912,  as  it  was  set  forth  in  Accounting  Circular  No.  6 
with  various  interpretations  in  a  series  of  fifty-one  questions 
and  answers  assembled  together  as  Circular  No.  7. 


IV.     THE  PERIOD   OF   ACCOUNTING  UNDER   FED- 
ERAL REGULATION. 

We  come  at  last  to  the  period  of  telephone  accounting 
that  is  under  the  regulation  of  the  Federal  Government,  and 
specifically  that  branch  of  the  Federal  Government  known  as 
the  Interstate  Commerce  Commission. 

1)     Authority  of  the  Commission. 

The  successive  steps  by  which  the  Interstate  Com- 
merce Commission  has  this  authority  are  these : 

First,  the  Constitution  provides  that  "Congress  shall 
have  power  *  *  *  ^q  regulate  commerce  with  foreign 
nations  and  among  the  several  states." 

Second,  the  "Act  to  Regulate  Commerce"  approved 
February  4,  1887,  constituted  the  Commission  and  gave 
it  jurisdiction  over  common  "carriers  engaged  in  the 
transportation  of  passengers  or  property  wholly  by  rail- 
road, or  partly  by  railroad  and  partly  by  water"  from 
one  state  to  another.  The  original  act  gave  the  Commis- 
sion limited  authority  as  to  accounts,  but  this  was  ex- 
tended by  amendment  in  1906,  and  beginning  with  1907 
uniform  accounting  for  railroads  has  by  successive  stages 
gone  into  effect. 

Third,  by  the  amendment  of  June  18,  1910,  "tele- 
graph, telephone  and  cable  companies  (whether  wire  or 

27 


wireless)    engaged  in  sending  messages  from  one  state 

*  *  *  to  any  other  state  *  *  *  or  to  any  foreign 
country"  were  brought  under  the  act  and  thereby  the  In- 
terstate Commerce  Commission  was  given  the  same  au- 
thority with  respect  to  accounts  of  telephone  companies 
as  it  had  previously  with  respect  to  railroads.  The  Com- 
mission has  authority  to  require  periodical  reports  and  to 
prescribe  the  manner  in  which  they  shall  be  made,  al- 
though the  statute  prescribes  certain  details  in  annual  re- 
ports (see  Section  20).  The  Commission  may  also  "pre- 
scribe the  forms  of  any  and  all  accounts,  records  and 
memoranda"  and  "at  all  times  have  access"  thereto. 
Further,  "any  person  who  shall  willfully  make  any  false 
entry     *     *     *     qj-   willfully    destroy,    mutilate    or   alter 

*  *  *  or  willfully  neglect  or  fail  to  make  full,  true  and 
correct  entries  *  *  *  shall  be  deemed  guilty  of  a  mis- 
demeanor" with  a  punishment  of  fine  or  imprisonment 
or  both. 

It  hardly  need  be  added  that  all  this  makes  the  con- 
trol of  the  Commission  absolute  over  the  accounts  of  the 
companies  concerned. 

2)     What  the  Commission  Has  Done. 

Soon  after  the  passage  of  this  amendment  of  June  18, 
1910,  by  which  telephone  companies  were  brought  under 
the  Act  to  Regulate  Commerce,  the  accountants  of  the 
Interstate  Commerce  Commission  began  work  on  a  sys- 
tem of  uniform  accounts  for  telephone  companies.  At 
about  the  same  time  the  Public  Service  Commission,  Sec- 
ond District,  of  New  York,  undertook  a  similar  task  for 
the  telephone  companies  in  the  State  of  New  York,  and 
there  was  an  effective  co-operation  between  the  repre- 
sentatives of  these  two  Commissions.     " 

Numerous  conferences  were  held  between  these  rep- 
resentatives of  the  Commissions  and  the  representatives 
of  telephone  companies,  as  a  result  of  which  the  Inter- 
state Commerce  Commission  issued  a  Tentative  System 
for  Uniform  Accounting  under  date  of  November  15,  1911, 
Accounting  Series  Circular  No.  30,  while  the  New  York 

28 


Public  Service  Commission  issued  an  order  prescribing 
accounts  to  go  into  effect  January  1,  1912. 

The  tentative  system  proposed  by  the  Interstate 
Commerce  Commission  w3is  not  received  by  telephone 
companies  until  late  in  the  year  1911,  and  there  was  so 
much  protest  against  its  becoming  eft'ective  January  1, 
1912,  that  another  year  was  given  for  consideration  of 
the  entire  subject.  During  this  year  more  conferences 
were  held  and  briefs  were  filed  by  various  parties  in  in- 
terest. Finally  the  Uniform  System  of  Accounts  for  Tele- 
phone Companies  having  annual  operating  revenues  ex- 
ceeding $50,000  was  issued  as  an  order  of  the  Interstate 
Commerce  Commission  on  December  10,  1912,  effective 
January  1,  1913.  This  is  now  the  official  system  of  ac- 
counts which  all  but  the  smaller  companies  are  hence- 
forth required  to  follow. 

The  accounts  prescribed  may  be  most  conveniently 
considered  under  six  groupings: 

a)  Balance  Sheet  Statement. 

b)  Income  Statement. 

c)  Corporate  Surplus  or  Deficit  Account. 

d)  Operating  Revenue  Accounts. 

e)  Operating  Expense  Accounts. 

f)  Clearing  Accounts, 
a)     Balance  Sheet  Statement. 

The  Balance  Sheet  Statement  comprises,  of 
course,  the  assets  and  liabilities,  and  of  the  assets 
Fixed  Capital  is  the  first  and  most  important.  "By 
the  Fixed  Capital  of  a  company  (frequently  termed 
the  Construction  account)  is  meant  the  property,  both 
tangible  and  intangible,  which  is  devoted  to  the  ac- 
complishment of  the  principal  purposes  of  its  busi- 
ness."    (Page  32.) 

As  to  the  Fixed  Capital  prior  to  January  1,  1913, 
the  Commission  requires  only  those  subdivisions 
which  each  company  had  on  its  books  at  December 
31.  1912,  the  intent  being  that  no  company  shall  be 
required  to  subdivide  its  property  held  at  that  time 
to  accord  with  the  subdivisions  of  Fixed  Capital  pre- 

29 


scribed  for  the  future. 

As  to  Fixed  Capital  installed  since  December  31^ 
1912,  certain  sub-accounts  are  required.  Besides  In- 
tangible Capital  (which  is,  in  turn,  divided  into  Or- 
ganization, Franchises,  Patent  Rights  and  Other 
Intangible  Capital)  the  sub-accounts  representing 
Physical  Plant  are  in  the  main  similar  to  those  al- 
ready in  effect  in  the  Bell  Telephone  System,  which 
have  already  been  mentioned. 

In  not  attempting  any  subdivisions  of  Fixed 
Capital  prior  to  January  1,  1913,  the  Commission  has 
doubtless  acted  wisely  from  the  standpoint  of  its 
jurisdiction  and  considering  the  previous  diversity  in 
property  accounts  of  the  numerous  small  com- 
panies throughout  the  country  not  following  the  Bell 
System  accounting. 

From  the  accounting  standpoint,  however,  we 
have  the  anomaly  that  the  Balance  Sheet  will  not 
show  a  distinction  between  the  intangible  property 
as  a  whole  and  the  physical  plant  as  a  whole. 

In  the  comments  of  the  Bell  System  filed  April 
13,  1912,  this  condition  is  criticised  in  the  following 
terms : 

"The  accounts  under  the  general  term  Fixed 
"Capital  do  not  distinguish  prior  to  January  1. 
"1912,*  between  physical  and  intangible  prop- 
"erty.  We  think  this  distinction  so  important 
"that  a  Balance  Sheet  not  making  it  is  practically 
"valueless.  We  think  too  that  the  term  Fixed 
"Capital  is  ill-chosen,  and  we  recommend  that 
"the  accounts  'Fixed  Capital  Installed  Prior  to 
"January  1,  1912'*  and  'Fixed  Capital  Installed 
"Since  December  31,  1911'*  be  eliminated,  and 
"accounts  entitled  'Physical  Plant'  and  'Intangi- 
"ble  Property'  with  appropriate  definitions  be 
"substituted." 


*See  page  8  of  Comments  of  Comptroller  of  American  Telephone 
&  Telegraph  Company  on  Tentative  Accounting  Series  C'rcular 
No.  30.  The  dates  were,  in  the  final  order,  set  a  year  later  b^^t  the^ 
principles   criticized  were  not   changed. 

30 


The  Commission  states  that  Fixed  Capital  con- 
sists of  Original  Capital,  Additions,  Betterments  and 
Replacements,  and  the  cost  thereof  should  be  charged 
in  accordance  with  definitions  given  of  these  terms. 

On  this  again  the  Bell  accountants  differed  from 
the  Commission  accountants  and  set  forth  the  reasons 
why  such  distinctions  could  not  be  made  in  practice 
co-ordinately  with  the  other  procedure  prescribed  for 
additions  to  and  withdrawals  from  plant.  It  is  prob- 
able that  the  intent  of  this  provision  can  be  met  by 
general  estimates  outside  the  regular  accounting  pro- 
cedure. 

In  other  respects  the  Commission  follows  in  the 
main  the  plan  of  Plant  and  Maintenance  accounting 
previously  used  by  the  Bell  System  and  hereinbefore 
described. 

The  Commission  has  attempted  to  see  that  for  the 
future  all  charges  to  Fixed  Capital  are  to  be  at  actual 
money  costs.  This  is,  generally  speaking,  a  proper 
rule,  but  occasions  will  arise  where  it  may  fairly  be 
questioned.  In  the  first  place.  Section  20  of  the  Act 
to  Regulate  Commerce  says  that  the  annual  reports 
of  the  companies  shall  show,  among  other  things, 
"the  cost  and  value  of  the  carrier's  property,  fran- 
chises and  equipments."  Now  cost  and  value  may  be 
synonymous  at  the  moment  property  is  acquired,  but 
value  usually  begins  to  change  immediately,  while 
cost  remains  fixed.  Yet  what  carrier  does  or  could 
keep  a  continuous  or  even  an  annual  value  of  its 
property?  Again  the  decisions  of  the  courts  in  rate 
cases  generally  take  "present  value"  as  a  basis  for  the 
amount  on  which  a  public  utility  is  entitled  to  earn  a 
fair  return.  This,  too,  is  commonly  the  rule  followed 
by  Commissions,  and  as  a  result  it  has  frequently 
happened  that  a  careful  inventory  or  physical  valua- 
tion of  the  property  at  a  given  time  has  had  to  be 
made,  as,  for  instance,  in  the  consideration  of  Massa- 
chusetts telephone  rates  a  few  years  ago,  at  which 
time  under  the  direction  of  the  Massachusetts  Com- 


31 


mission  the  inventory  value  was  placed  on  the  books 
of  the  company. 

Another  difference  of  opinion  arises  in  connec- 
tion with  going  or  completed  plant  purchased.  The 
natural  rule  would  seem  to  be  that  the  cost  of  repro- 
duction should  be  appraised  at  the  time  of  purchase 
and  added  to  the  Fixed  Capital  Accounts  and  the  ac- 
crued depreciation  thereon,  likewise  appraised,  should 
be  added  to  the  account  Reserve  for  Accrued  De- 
preciation. But  the  Commission,  after  carefully  con- 
sidering the  points  involved,  determined  that  the  net 
of  these  two  values  (but  not  exceeding  the  actual 
cost  in  any  case)  should  be  charged  the  Fixed  Capi- 
tal accounts  as  being  the  cost  to  the  purchaser.  The 
Report  of  the  Committee  on  Telephone  and  Tele- 
graph Rates  and  Service  of  the  National  Association 
of  Railway  Commissioners  submitted  in  November, 
1912,  gives  a  view  of  several  State  Commissioners  as 
differing  from  the  Interstate  Commissioners  as  fol- 
lows: 

"Would  it  not  be  well  for  us  to  consider 
"some  of  the  modifications  which  suggest  them- 
"selves,  such  as  *  *  *  the  setting  up  of 
"plant  values  in  such  form  that  uniform  bases  of 
"values  shall  become  the  basis  of  the  accounts, 
"not  leaving  part  of  the  values  entered  in  ac- 
"counts  as  cost  or  replacement  value  new,  and 
"part  as  depreciated  value  at  the  various  points 
"of  acquisition."* 

Doubtless  some  solution  will  be  found  of  these 
various  views  with  respect  to  what  values  the  books 
should  show  under  Fixed  Capital,  but  at  the  present 
time  the  prospect  of  representative  plant  values  on  a 
common  basis  for  all  alike  is  very  faint. 

The  other  assets  and  liabilities  are  carefully  de- 
fined, and,  being  along  the  lines  commonly  accepted 
by  accountants  as  sound  accounting  practice,  need 
not  be  described  here. 


*p.   798   Public   Service   Regulation,   December,    1912. 

32 


b)     Income  Account. 

The  Income  Account  brings  together  the  Operat- 
ing Revenues,  the  Operating  Expenses,  the  Non- 
operating  Revenues  and  the  Non-operating  Revenue 
Deductions,  the  net  balance  of  which  is  called  the 
Gross  Income  for  the  period.  From  this  Gross  In- 
come so  determined  are  deducted  Rent,"*"  Interest, 
Amortization  of  Landed  Capital,  and  various  mis- 
cellaneous items,  resulting  in  a  balance  called  Net  In- 
come. The  disposition  of  this  Net  Income  for  Sink- 
ing or  other  Reserve  Funds,  for  Dividends  and  for 
any  other  appropriations  is  then  shown  and  the  bal- 
ance is  transferred  to  the  Corporate  Surplus  or  De- 
ficit Account. 

c)     Corporate  Surplus  or  Deficit  Account. 

The  Corporate  Surplus  or  Deficit  Account  is  the 
connecting  link  between  the  Income  Account  and  the 
Balance  Sheet.  It  summarizes  the  changes  in  the  Cor- 
porate Surplus  or  Deficit  during  a  given  fiscal  period 
and  also  the  accounting  adjustments  and  miscel- 
laneous losses  or  gains  not  attributable  to  the  period 
or  not  provided  for  elsewhere,  and  for  these  purposes 
debit  and  credit  sub-accounts  under  Surplus  are  pro- 
vided. 

Among  these  debit  sub-accounts  of  Surplus  is 
"Realized  Depreciation  not  covered  by  Reserves," 
which  account  would  not  be  necessary,  of  course,  if 
all  companies  now  had  adequate  depreciation  re- 
serves. It  is  the  intention  that  Surplus  shall  be 
charged  the  original  cost  less  salvage  of  any  tangible 
fixed  capital  which  is  retired  whenever  the  deprecia- 
tion therefor  has  not  been  provided  through  a  de- 
preciation reserve. 


♦Rentals  paid  for  offices  and  other  quarters  have  heretofore  been 
considered  an  operating  expense.  The  change  by  which  they  become 
a  deduction  from  gross  income  is  an  important  innovation  which  the 
companies  generally  believed  was  unwise. 

33 


d)  Operating  Revenue  Accounts. 

The  two  main  classes  of  revenue,  Exchange  and 
Toll,  are  continued  as  they  have  come  down  through 
many  years. 

Exchange  service  revenue  may  be  said  to  include 
the  revenue  from  messages  transmitted  from  one  tele- 
phone station  to  another,  when  both  stations  are 
within  what  is  commonly  known  as  an  exchange 
area. 

Toll  service  revenue,  on  the  other  hand,  is  that 
derived  from  messages  between  telephone  stations  in 
different  exchange  areas.  If  such  a  message  is  trans- 
mitted over  the  lines  of  more  than  one  company  the 
revenue  is  by  arrangement  between  such  companies 
divided  among  them  and  each  reports  as  toll  revenue 
only  that  part  of  the  tolls  to  which  it  is  entitled. 

e)  Operating  Expense  Accounts. 

Four  main  divisions  of  operating  expense  ac- 
counts are  provided: 

First:  Maintenance  expense,  which  continues 
the  classification  previously  prevailing  in  the  Bell 
companies  of  Repairs  (subdivided  according  to  classes 
of  plant).  Station  Removals,  and  Depreciation. 

Second:  Traffic  expense,  which  represents  the 
cost  of  operating  the  central  offices  and  public  pay 
stations. 

Third :  Commercial  expense,  which  is  principally 
the  cost  of  soliciting  business,  of  directories,  and  of 
accounting  for  and  collecting  the  revenue. 

Fourth:  General  and  miscellaneous  expenses 
include  the  cost  of  general  administration,  legal  ex- 
penses, insurance,  compensation  for  accidents  and 
damages,  relief  to  employees  and  pensions,  and  the 
amortization  of  franchises. 

f)  Clearing  Accounts. 

The  so-called  clearing  accounts  are  provided  for 
those  expenses  which  usually  affect  several  classes 

34 


of  operations  but  have  to  be  brought  together  in  one 
account  in  order  that  the  total  expenses  under  each 
may  be  known  and  may  be  properly  distributed.  One 
of  these  clearing  accounts  may  be  taken  as  typical  of 
the  whole,  namely,  Plant  Supervision  Expense.  The 
Plant  Department  of  a  telephone  company  has  the 
two-fold  responsibility  of  maintaining  the  plant  al- 
ready in  service  and  of  constructing  new  plant.  The 
construction  of  new  telephone  plant  is  a  continuous 
process,  both  by  reason  of  the  rapid  growth  of  the 
telephone  service  and  also  because  of  the  reconstruc- 
tion of  existing  plant.  The  employees  of  the  Plant 
Department  are  best  organized  under  one  general 
supervision  and  the  expense  of  this  supervision  can- 
not as  it  is  incurred  be  charged  directly  to  the  proper 
plant  asset  or  maintenance  accounts.  It  is  therefore 
grouped  together  in  this  clearing  account  called  Plant 
Supervision  Expense  and  at  the  end  of  each  month 
the  account  is  cleared  by  charging  to  the  proper 
plant  and  maintenance  accounts  such  expenses  as  can 
be  allocated  to  particular  pieces  of  work,  the  balance 
being  distributed  on  the  basis  of  labor  employed  in 
all  construction  and  maintenance  work  in  progress. 

V.     CONCLUSION. 

The  establishment  of  this  accounting  system  by  the  In- 
terstate Commerce  Commission  involves  a  vital  change  in  the 
attitude  of  the  chief  accounting  officer  in  every  telephone  com- 
pany toward  the  accounts  of  his  company.  While  he  should 
continue  to  keep  the  accounts  by  such  methods  as  will  express 
for  the  administrative  officers  of  his  company  and  for  the  in- 
vesting public  the  results  of  the  business  in  the  form  most 
significant  for  their  uses,  yet  he  can  do  this  only  so  far  as  it 
will  not  conflict  with  the  official  accounting  prescribed.  His 
main  responsibility  is  now  to  follow  the  law  laid  down  for  him 
by  the  Interstate  Commerce  Commission.  This  has  no  less 
difficulties,  but  they  are  the  difficulties  of  interpretation  rather 
than  of  creation. 


35 


In  the  great  public  utilities  of  to-day  certainty,  complete- 
ness and  safety  are  the  prime  essentials,  or,  in  other  words, 
the  efficiency  of  the  service  comes  first.  The  help  that  good 
accounting  can  give  toward  efficiency  in  this  complex,  con- 
stantly developing  and  nation-wide  telephone  service  is  very 
great.  Likewise  the  harm  and  hindrance  of  poor  accounting 
is  very  serious. 

We  have  seen  that,  in  its  main  features,  telephone  ac- 
counting has  been  an  evolutionary  process  proceeding  more 
rapidly  at  some  times  than  at  others,  but  following  closely  the 
rapid  development  of  the  industry  itself.  Yet,  while  the  main 
features  have  not  been  suddenly  or  radically  changed,  there 
has  been  much  variety  and  flexibility  in  the  secondary  ac- 
counting, and  this  has  contributed  greatly  to  the  progress  of 
the  whole. 

Now  the  rigidity  of  law  has  taken  the  place  of  this  flexi- 
bility, and,  while  we  may  reasonably  expect  that  the  Commis- 
sion and  its  representatives  will  be  liberal  and  constructive  in 
their  interpretation  of  their  accounting  instructions,  neverthe- 
less we  must  not  blink  at  the  fact  that  those  instructions 
have  the  force,  the  exactitude  and  the  rigidity  of  law.  Not 
only  must  their  intent  or  spirit  be  followed,  but  their  literal 
meaning  must  be  complied  with,  and  whenever  that  literal 
meaning  is  ambiguous  or  doubtful  its  interpretation  and  its 
application  in  specific  cases  must  be  sought  from  the  Com- 
mission. 

There  are  obvious  dangers  in  this  exactitude  and  rigidity, 
chiefly  because  the  slow  and  cumbersome  processes  through 
which  interpretations  must  be  sought  or  changes  in  accounts 
authorized  will  tend  to  discourage  progress.  Such  dangers 
can  be  overcome,  or  at  least  greatly  minimized,  by  active  and 
effective  co-operation  between  the  companies  and  the  Com- 
mission. For  instance  an  organization  of  telephone  account- 
ing officers  could  through  discussion  and  recommendations  do 
much  toward  keeping  the  accounting  prescribed  by  the  Com- 
mission abreast  with  the  country's  developing  telephone  ser- 
vice. 

Whatever  misgivings  we  may  have  about  some  of  the  ac- 
counting methods  now  prescribed  or  the  possible  check  to  ac- 


36 


counting  progress  through  the  rigidity  of  a  prescribed  system, 
yet  after  all  these  are  minor  points  in  the  working  out  of  a 
great  public  policy — the  regulation  of  public  utilities — and  I 
for  one  believe  that  in  carrying  out  this  policy  the  American 
people  not  only  intend  to  adjust  fairly  all  the  natural  rights  of 
investors,  employees  and  patrons,  but  what  is  more  will  find  a 
practical  way  to  do  it. 


37 


VI.     APPENDICES. 

As  most  of  the  early  circulars  on  accounts  and  forms  for 
statements  are  out  of  print  and  no  longer  available,  the  fol- 
lowing appendices  are  added  as  likely  to  be  of  interest  and 
value  to  future  students  of  the  subject: 

Appendix  A— Form  for  Statement  of  Business  used  by  Bell 
Companies  in  1883. 

Appendix  B — Circular  on  Accounts  April  25,  1884. 

Appendix  C — Circular  on  Accounts  December  30, 1887. 

Appendix  D — Forms  recommended  by  Mr.  Edward  J.  Hall, 
about  1890. 

Appendix  E — Circular  on  Accounts  January  1,  1891. 

Appendix  F — Form  for  Condensed  Trial  Balance  and  State- 
ment of  Business — substantially  as  used  from 
about  1891  to  1908. 
The  only  subsequent  circular  on  accounts  issued  by  The 
American  Bell  Telephone  Company  was  that  dated  January 
1,  1904.     This  together  with  the  following  circulars  issued  by 
American  Telephone  and  Telegraph  Company  are  still  avail- 
able : 

Accounting  Circular  No.  1 — Dec.  20,  1907.  Complete  Ac- 
counting System. 

No.  2— Jan.  20,  1908.  Damage  and 
Compensation  Accounts. 

No.  3— Nov.  21,  1908.  Real  Estate  and 
Private  Line  Revenue. 

No.  4— Nov.  23,  1908.  Maintenance  Ac- 
counts. 

No.  5— Jan.  11,  1909.  Questions  and 
Answers. 

No.  5A— May  6,  1909.  Questions  and 
Answers. 

No.  5B— July  26,  1909.  Questions  and 
Answers. 

38 


Accounting  Circular  No.  6 — Nov.  15,  1909.  Complete  Ac- 
counting System.  (Cancels  all  pre- 
vious circulars.) 

No.  6A— Dec.  1,  1910.     Minor  Changes. 

No.  6B— Jan.  28,  1911.    Minor  Changes. 

No.  6B-1— June  10,  1911.  Minor 
Changes. 

No.  6C— Dec.  20,  1911.   Minor  Changes. 

No.  6C-1— Dec.  28,  1911.  Minor 
Changes. 

No.  6— First  Revision  Jan.  1,  1912. 
Complete  Accounting  System. 
(Cancels  all  previous  circulars.) 

No.  6A— June  1,  1912.    Minor  Changes. 

No.  7— Feb.  3,  1910.  Questions  and 
Answers. 

No.  7A— May  9,  1910.  Questions  and 
Answers. 

No.  7B— Sept.  15,  1910.  Questions  and 
Answers. 

No.  7C— March  15,  1911.  Questions  and 
Answers. 

No.  7D— June  8,  1912.  Questions  and 
Answers. 

No.  8— Dec.  28,  1912.  Complete  Ac- 
counting System  based  on  Interstate 
Commerce  Commission  order  of  De- 
cember 10,  1912. 

No.  9— Dec.  28,  1912.  List  of  Circular 
No.  6  accounts  and  corresponding 
^  Circular  No.  8  accounts. 


39 


APPENDIX  A 


FORM    FOR   STATEMENT   OF   BUSINESS 
USED  BY  BELL  COMPANIES  IN  1883. 


APPENDIX  A 


Company. 


TRIAL   BALANCE, 

488 

DR. 

CR. 

CAPITAL  STOCK. 

SURPLUS. 

RESERVE, 

For  Unearned  Rentals, 

For 

ACCOUNTS  PAYABLE. 

Pay  Roll, 

Sundry  Creditors, 

OUTSTANDING  TOLL  TICKETS  AND  TOLL  DEPOSIT  ACCOUNT. 

LICENSES  AND  RIGHTS  OF  WAY. 

CONSTRUCTION, 

BELLS. 

MERCHANDISE. 

PERSONAL  PROPERTY, 

ACCOUNTS  RECEIVABLE, 

STOCKS  AND  BONDS, 

CASH. 

EARNINGS. 

Exchange, 

Extra  Territorial, 

Private  Line. 

Telegraph  Commissions, 

Messenger, 

Miscellaneous. 

EXPENSES, 

General  Office, 

Operating, 

Messenger. 

Pole  Rent, 

Miscellaneous, 

Repairs  and  Maintenance, 

Reconstruction, 

Damage  and  Compensation, 

Commission,  Am.  Bell  Tele.  Co.,  on  Ex. Ter.  and  Teleg. Business, 

Rental.  American  Bell  Telephone  Co., 

DIVIDEND  ACCOUNT, 

APPENDIX  A 


ASSETS. 

LIABILITIES. 

LICENSES  &  RIGHTS  OF  WAY 

1 

CAPITAL  STOCK, 

CONSTRUCTION. 

BONDS. 

MERCHANDISE, 

SURPLUS, 

PERSONAL  PROPERTY. 

RESERVE, 

ACCOUNTS  RECEIVABLE. 

ACCOUNTS  PAYABLE, 

STOCKS  AND  BONDS, 

i 

PROFIT  AND  LOSS. 

CASH. 

1 

i 

! 

General  Statement  of  Business  for  the  Quarter  Ending 


188 


Gross  Earnings 


Expenses. 


Net  Earnings, 


Increase  of  Earnings  over  those  of  previous  quarter. 


Expenses, 


Net  Earnings 

Per  Cent,  of  Expenses  to  Earnings, 


Per  Cent,  of  Net  Earnings  to  Capital, 


Dividends  paid  during  the  quarter. 


Number  of  Exchanges. 


Monthly  rate  for  Residences. 


Offices. 


Gross  Receipts  from  Extra  Territorial  Business. 


Per  cent,  of  Extra  Territorial  to  Gross  Earnings, 


Cajital  Stock  issued. 


Par  value  per  share. 


Number  of  Telephones  in  use. 


Net  Income  per  Telephone  in  use. 


APPENDIX  B 


Form  319. 


H'.  H.  FOnnES,  Prcsidtut. 

C    P.  nOWDITCll.  VUt  PrtiidtHt. 


SUBJECT. -ACCOUNTS. 


TtlEO.  N.   VAIL.  GfUfral  Manager. 
WM.  R.  DRIVER,  TrtafHrer. 


'^ 


^^^KlC^t^  BELL  Telephone  Cq^, 


J^o.  gj)  Milk  Street. 


fAHy 


P.  O.  DRAWER  J. 


Boston,  April  25,  18S4. 

Gentlemen: — 

We  have  frequently  been  asked  for  advice  regarding  the  best  method 
of  keeping  the  accounts  of  telephone  companies,  and  now  beg  to  offer  the  following  sugges- 
tions, the  general  adoption  of  which  will,  we  believe,  be  found  of  advantage,  in  effecting 
such  uniformity  in  the  accounts  of  the  several  companies  as  will  afford  better  opportunities 
for  the  comparison  of  results. 

It  is  desirable  that  not  only  the  record  of  instruments  and  leases,  but  the  inventories  of 
property  of  different  classes, — Exchange  Apparatus,  Bells,  Mileage  of  Wire,  Poles,  etc., — 
should  be  kept  with  accuracy;  and  that  the  system  of  accounts,  while  not  too  complicated, 
should  be  capable  of  showing,  at  the  end  of  each  month,  the  true  condition  of  the  company's 
affairs,  and  the  actual  earnings  and  expenses  pertaining  to  the  several  departments  of  the 
business. 

The  following  list  includes  the  accounts  which  have  been  found  in  most  common  use 
upon  the  books  of  the  principal  telephone  companies: — 

Capital  Stock. 
Surplus. 

Reserve  for  Unearned  Rentals. 
"         "    Depreciation 


Licenses. 

Rights  of  Way. 

Investment. 

Construction  Accounts. 

Bells. 

Merchandise. 

Personal  Property  Accounts. 

Oflicc  Furniture  and  Fixtures. 

Tools. 

Horses  and  Wagons. 
Accounts  Receivable. 
Stocks  and  Bonds. 
Cash. 
Expense  Accounts. 

General  Office. 

Rents. 

Insurance. 

Taxes. 

Stationery  and  Printing. 

Operating. 

Extra-TerrJtorial. 

Private  Line. 

Messenger. 

Pole  Rent. 

Repairs  and  Maintenance. 

Reconstruction. 

Proportion  A.  B.  T.  Co.  Ex-Ter.  Receipts. 

Proportion  A.  B.  T.  Co.  Telegraph     " 

Rental  Am.  Bell  Tel.  Co. 

Miscellaneous. 
Dividend  Account 


•'         "    Doubtful  Accounts. 
Outstanding  Toll  Tickets. 
Accounts  Payable. 

*  Pay  Roll. 
Sundry  Creditors. 


Earnings  Accounts. 
Exchange. 
Tolls  (Exchange.) 
Extra-Territorial. 
Private  Line. 
Telegraph  Commissions. 
Messenger. 
Miscellaneous. 


In  addition  to  the  numerous  personal  accounts,  most  companies  find  it  necessary  to  make 
use-  of  others  than  those  named  above,  to  represent  transactions  of  a  special  nature.  In  the 
printed  form  of  trial  balance  which  we  have  provided,  spaces  have  been  left  for  such  ac- 
counts. 

In  the  foregoing  list,  "Merchandise"  is  the  account  showing  the  value  of  material  not 
yet  applied  to  construction  or  repair. 

"  Accounts  Receivable"  includes  uncollected  dues,  as  shown  by  the  subscribers'  ledger, 
and  total  of  debtor  personal  accounts  on  the  general  ledger. 

In  the  Expense  accounts,  "  General  Office"  includes  salaries  and  expenses  pertaining  to 
the  general  management  of  the  business;,  "  Operating,"  the  salaries  and  ordinary  expenses  of 
operating  exchanges;  "  Reconstruction,"  that  portion  of  the  cost  of  rebuilding  or  replacing 
property  not  properly  chargeable  to  Construction* 

When  bills  are  sent  out  for  quarterly  or  semi-annual  rentals,  "Accounts  Receivable" 
should  be  charged  with  the  amount  of  the  bills,  and  Earnings  credited  with  one  month's  pro- 
portion of  the  amount,  the  "Unearned  Rental"  account  being  credited  with  the  remainder; 
at  the  beginning  of  each  successive  month,  the  latter  account  to  be  charged,  and  Earnings 
credited,  with  that  month's  proportion.  As  the  bills  are  paid,  of  course  "  Cash"  is  debited 
and  "  Accounts  Receivable"  credited. 

''  Outstanding  Toll  Tickets."  When  tickets  are  sold,  this  account  should  be  credited  with 
the  proceeds  of  sale.  At  the  end  of  the  month,  Earnings,  "Toll,"  "  Extra-Territorial"  etc., 
should  be  credited  with  the  amount  of  the  tickets  redeemed,  this  account  then  being  charged 
with  like  amount. 

As  regards  the  closing  of  the  books,  the  practice  varies  with  different  companies.  A 
few  close  quarterly,  the  greater  number  at  the  end  of  the  financial  year,  which  has  some  ad- 
vantages over  the  other  plan^ 

"  Construction"  should  represent  the  value  of  the  plant,  and  may  properly  be  subdivided," 
according  to  the  service  to  which  the  property  is  applied,  into  "  Exchange,"  "  Toll  Line," 
*'  Extra-Territorial  Line,"  and  "  Private  Line."  It  is  recommended  that  the  accounts  for  the 
several  classes  of  new  construction  be  kept  distinct,  and  at  the  close  of  each  financial  year, 
carried  to  the  general  construction  accounts. 

This  account  should  be  charged  with  the  value  of  exchanges,  lines,  .etc.,  purchased  or 
built.  In  the  case  of  new  construction,  the  cost  of  material  and  labor,  and  expense  incident 
to  the  new  work,  constitute  a  part  of  its  value,  as  well  as  the  salaries  of  officers  employed 
expressly  for  the  purpose  of  directing  the  work. 

In  case  of  the  rebuilding  of  an  exchange  or  line,  of  change  from  housetop  to  pole 
lines,  the  substitution  of  cables  for  separate  wires,  or  in  general  such  change  of  plant  or 
apparatus  as  replaces  an  inferior  system  with  one  affiDrding  better  facilities,  "  Construction'* 
should  be  charged  with  the  cost  of  the  new  plant,  and  credited  with  the  cost  of  the  old,  less 
the  value  of  such  portion  of  the  old  material  as  has  been  used  in  the  reconstruction.  If  any 
part  of  the  old  material  has  been  placed  in  stock  for  future  use,  the  "  Merchandise"  account 
should  be  charged  with  the  value  of  such  material.  The  balance  of  cost  of  the  first  plant 
should  be  charged  to  Expense,  under  the  head  of  "  Reconstruction,"  upon  the  principle  that 
the  material  not  fit  for  use,  and  the  cost  of  the  labor,  are  an  absolute  loss. 


As  regards  the  accounts  to  which  certain  salaries,  for  instance  those  of  the  General 
Manager,  superintendents  and  canvassing  agents,  should  be  charged,  the  weight  of  opinion, 
among  those  who  have  Seen  long  engaged  in  the  management  of  the  telephone  business,  is 
against  making  such  expenditures  a  charge  upon  the  Construction  account. 

In  a  company  whose  business  is  well  established,  it  is  difficult  to  see  why  any  part  of 
the  general  dffice  expenses,  or  the  salaries  of  general  officers,  other  than  those  who  are  dis- 
tinctively emplo3'ed  upon  new  construction,  should  be  charged  to  the  Construction  account, 
these  being  expenses  necessary  to  the  maintenance  of  the  business,  and  which,  it  is  fair  to 
assume,  would  be  continued,  even  upon  the  cessation  of  new  construction,  while  the  volume 
of  business  remained  substantially  the  same. 

It  seems  equally  clear  that  .the  salaries  of  officers  of  an  established  exchange,  whose 
principal  duties  are  the  care  of  property  and  the  management  of  the  regular  business  of  the 
exchange,  though  a  part  of  their  time  may  be  employed  in  enlarging  the  business  and  taking 
charge  of  new  construction  incident  thereto,  should  be  charged  under  the  head  of  Expense, 

The  cost  of  advertising,  or  the  pay  of  canvassers  for  new  business,  cannot  properly  be  re- 
garded as  part  of  the  cost  of  new  construction,  although  by  such  means  the  business  may  be 
extended  and  new  construction  be  necessitated. 

The  telephone  business  has  not  been  sufficiently  long  established  to  afford  trustworthy 
statistics  from  which  the  average  depreciation  of  plant  and  equipment  can  be  determined.  The 
usual  estimate  of  such  depreciation  is  ten  per  cent,  yearly,  taking  all  classes  of  property  to- 
gether Assuming  that  the  greater  portion  of  the  lines  ^nd  exchanges  now  in  use  have  been 
either  constructed  or  rebuilt  during  the  past  three  years,  and  that  upon  the  books  of  most 
of  the  companies  the  Construction  account  stands  charged  with  the  larger  part  of  the  cost  of 
rebuilding,  as  well  as  the  cost  of  new  work,  it  is  certain  that  the  present  expense  for  Repairs  and 
Reconstruction  is  not  proportionate  to  the  actual  deterioration  of  property,  and  that  in  future 
years  the  revenue  of  most  companies  will  be  subjected  to  much  heavier  charges  on  this  ac- 
count. It  is  suggested  that  a  reserve  fund  be  set  apart,  to  which  shall  be  carried  such  part 
of  the  annual  profits  as  represents  the  estimated  amount  of  yearly  depreciation  not  covered 
by  the  expenditure  on  account  of  Repairs  and  Reconstruction. 

It  is  worth  considering  also  whether  the  Construction  account  should  not  be  credited 
with  the  cost  of  such  property  as  falls  into  disuse  and  is  abandoned,  by  reason  of  discontinu- 
ance of  subscribers. 

Yours  very  respectfully 

Atuiz'ior. 


APPENDIX  C 


Subject:    Distribution  of  Expenses. 

HOWARD  STOCKTON  THE   AMERICAN    BELL  TELEPHONE  CO. 

President. 

No.  95   MILK   STREET. 

JOHN  E.  HUDSON.  «^u.   C7vj    vlil^o.    oirxx-ci.. 

Viee-Pret.  and  Gen.  Man'gr.  p.  o.  DRAWER  2. 

WM.  R.  DRIVER.  Treasurer. 


B0.ST0N,  December  30,  1887. 


Gentlemen: 

In  our  Circular  of  April  25th,  1884,  we  presented  an  outline  for  a  system  of  accounts, 
which,  in  its  essential  features,  is  now  employed  by  most  of  the  companies  throughout  the' 
country.  Its  general  adoption  has  proved  of  unquestioned  value,  by  facilitating  the  com- 
parison of  results  in  different  localities.  We  believe  the  principles  stated  in  that  Circular 
have  been  recognized  by  those  having  the  management  of  telephone  companies,  without 
exception,  as  correct. 

In  naming  the  several  subdivisions  of  Expense,  it  seemed  advisable  to  avoid  the 
multiplication  of  accounts,  which  might  involve  a  considerable  addition  to  the  work  and 
cost  of  the  accounting  departments.  Otherwise  the  list  might  have  been  extended.  By 
several  of  the  companies,  a  further  subdivision  has  been  made. 

The  practice  is  not  yet  quite  uniform,  as  regards  the  apportionment  of  Expense 
under  its  several  heads,  and  to  secure  greater  uniformity,  which  is  certainly  desirable, 
we  offer  the  following  suggestions,  having  first  consulted  many  of  those  having  charge 
of  company  accounts:  — 

DISTRIBUTION    OF    EXPENSES. 

1.  General  Office,  Should  include  Salaries  of  Executive  and  Financial  Officers,  Clerks, 

and  other  General-Office  Employees;  their  Travelling  Expenses  while 
engaged  upon  the  general  business  of  the  Company ;  the  Repair 
of  Furniture,  Light,  Heat,  and  incidental  expenses  of  the  General 
Offices. 

2.  Rents.  All  Rents. 

3.  Insurance.  All  Premiums. 

4.  Taxes.  All  Taxes. 

5.  Stationery  and 

Printing.  All   Books.  Stationery,  Printing,  Postage. 


6.  Operating.  Salaries  and  Wages  of  Exchange  Managers,  Operators,  Collectors. 

and  others  engaged  upon  the  Current  Exchange  Work  (other  than 
the  Construction  and  Repair  force)  ;  their  Travelling  and  incidental 
expenses;  Battery  Supplies,  Fuel,  Light,  and  other  local  charges. 
The  Salary  and  incidental  expenses  of  the  Division  Superintendent 
may  properly  be  apportioned  to  the  several  exchanges  constituting 
his  division. 

7.  Extra-Territorial.     This   account   should    be   subdivided   into   "  Operating "   and 

"  Repair."  When  it  is  practicable  to  separate  the  cost  of  working 
the  extra-territorial  system  from  that  of  the  exchanges,  the  former 
subdivision  includes  items  of'similar  nature  to  those  named  in  6; 
the  latter,  such  as  are  named  in  u.  The  extra-territorial  work  is 
of  necessity  so  closely  interwoven  with  that  of  the  exchanges,  that 
most  of  the  Companies  have  been,  thus  far,  unable  to  make  a  satis- 
factory division  of  the  accounts. 

8.  Private  Line.    Actual  Expense  of  the  Private  Line  and  Agency  System,  excepting 

Instrument  Rental. 

9.  Messenger. 
10.   Pole  Rent. 


11.  Repairs   and    Salaries  and  Wages  of  Foremen,  Linemen,  Inspectors,  and  Laborers 
Maintenance,    engaged  in  keeping  the  plant  and  property  in  serviceable  condition; 

cost  of  Repair  Material,  and  the  Freight  thereon ;    Travelling  and 
other  expense  incident  to  the  work. 

12.  Reconstruction.    Items  of  similar  character  to  those  above  named,  which  pertain 

to  the  work  of  Reconstruction  as  defined  in  Circular  of  April  25th, 


13.  Damage    and    Cost  of  injury  to  persons  or  property  caused  by  the  Poles,  Fixtures, 
Compensation.    Wires,  etc.»  of  the  Company. 

14.  Rebate.  Allowance  to  Subscribers  for  interrupted  or  defective  service;   also 

charges  from  Accounts  Receivable  for  uncollectible  dues. 


15.    Proportion  to 
Am.  Bell  Tel. 

Co.  of  Extra-    This   should  correspond  with  amount  stated   in  monthly  returns, 
Terr'l  Rec'ts.   form  304. 


i6.  Proportion  to 
Am.  Bell  Tel. 
Co.  of  Tele- 
graph Rec'ts. 


17.  Rental,   Am.    Amount    of    Rental,   after   credits    made   on   account   of    Rental 
Bell  Tel.  Co.    Concessions: 

(a)    Exchange  Instruments. 

(6)    Extra-Territorial  Instruments. 

(c)     Private  Line  Agency,  etc..  Instruments. 

18.  Miscellaneous.  Items  which  cannot  readily  be  classified  under  the  above  headings. 

With  the  aid  of  proper  monthly  returns  and  vouchers,  showing  classification  of 
Expense,  from  the  Exchange  Managers,  it  becomes  practicable  to  exhibit  the  Earnings 
and  Expenses  of  the  several  exchanges,  distributed  under  the  various  headings,  including 
the  actual  rental  of  instruments. 

To  make  such  statements  complete  it  is  necessary  to  apportion  General  Expense, 
State  Taxes,  and  some  other  items  which  cannot  be  localized,  upon  an  arbitrary  basis. 
It  seems  the  best  practice  to  apportion  these  expenses  upon  the  basis  of  Gross  Earnings 
of  the  Exchanges ;  charging  to  the  Extra-Territorial  and  Private  Line  branches  of  the 
service  their  due  proportion,  when  the  accounts  of  these  branches  are  kept  distinct  from 
those  for  the  Exchange  Systems. 

Local  tolls,  that  is,  charges  for  messages  within  exchange  limits,  are  essentially  a 
part  of  the  exchange  revenue.  It  is  desirable  to  have  a  separate  account  for  the  earn- 
ings from  this  source,  ("  Exchange  "  earnings  in  our  forms  being  intended  only  for 
subscribers'  rentals);  but  we  do  not  suggest  carrying  the  expenses  for  this  service  to  a 
distinct  account. 


'IliC^aZ,^, 


Very  respectfully^ 

iditor. 


APPENDIX  D 


FORMS  RECOMMENDED  BY 

MR.  EDWARD  J.  HALL 

ABOUT  1890. 


APPENDIX  D 


Dr 


TRIAL 


Intangible 


Plant 


ASSETS  < 


Investment 


Quick 


EXPENSES 


Franchise 
Good  Will 
Patents 

Exclianofes 


Underground 

Conduits 
/  Underground 
^  Cables 

Equipment 
Toll  Lines 


Real  Estate 
Stocks  and  Bonds 


PROFIT  AND  LOSS  CHARGES    < 


Consolidated   from 

several   accounts 

or  Auxilliary  books 

do 
do 
do 
do 


Merchandise 

<: 

do 

J  Accounts 
S  Receivable 

< 

do 

^Cash 

Operating 

< 

do 

Maintenance 

< 

do 

General  Expense 
< 
Royalty- 

< 

do 

■< 

do 

Taxes 

<: 

do 

N 

<: 

do 

Dividends  Paid 

<  Interest 

Profit  and  Loss 

APPENDIX  D 


BALANCE 


Cr 


Stockholders 


Reserve  Accounts  < 


LIABILITIES    < 


Funded 


Quick 


Telephone 


EARNINGS        < 


Capital  Stock 
Surplus 

^Unearned 
Rentals 

Toll  Tickets 
Depreciation 

Bills  Payable 
Accounts  Payable 

Exchange  Service 


Toll  Line 
Service 


Private  Lines 


Consolidated   from 

several   accounts 

or  Auxilliary  books 

do 


do 


Real  Estate 


Other  Sources         <  Dividends  and  Interest 


Miscellaneous 


do 
do 

do 

do 
do 


APPENDIX  D 


CONDENSED  INCOME  ACCOUNT 

TELEPHONE  EXPENSES  TELEPHONE  EARNINGS 


Operating 

Maintenance 

General  Expense 

Royalty 

Taxes 

Balance 

Total 


Exchange  Service 
Toll  Messages 
Private  Lines 


Miscellaneous  Expenses 

Interest 

P.  and  L.  Charges 

Balance 


Telephone  Income  Balance 
Real  Estate 
Dividends  and  Interest 
Miscellaneous 


CONDENSED  INVENTORY  &  STATISTICS 


APPENDIX  D 


Annual  Budg^et 


1891 

JANUARY 

FEBRUARY,   etc 

NUMBER  OF  SUBSCRIBERS 

MONTH 

PER  STATIC M 

EARNINGS 

Exchange  Service 
Toll  Messages 
Private  Lines 

TOTAL  EARNINGS 

EXPENSES 

Operating 

Managers  and  Operators 
Office  Rent 
Pay  Stations 
Light  and  Fuel 
Printing  and  Stationery 
Miscellaneous 

TOTAL  OPERATING 

Maintenance 

Labor 

Materials 

Traveling  Expenses 

Damages 

Pole  Rental 

Conduit  Rental 

Rent 

Printing  and  Stationery 

Light  and  Fuel 

Miscellaneous 

TOTAL  MAINTENANCE 

General  Expense 

Salaries 

Traveling  Expenses 

Legal 

Rent 

Light  and  Fuel 

Printing  and  Stationery 

Canvassing  and  Advertising 

Miscellaneous 

TOTAL  GENERAL  EXPENSE 

Royalty 

Rentals  to  A.  B,  T.  Co. 
Extra  Territorial  Commission 
Telegraph  Com.mission 
Switchboard 

TOTAL  ROYALTY 

Taxes 

Franchise  and  License 

Gross  Receipts 

Plant 

Personal  Property 

TOTAL  TAXES 

Total  Earnings 
do     Expenses 

Income  Balance 

Stations  Added 
do         Removed 

Total  Changes 
Net  Gain 

Expended  for  Construction 

Exchange 
Underground  Conduit 

do             Cables 
Toll  Lines 
Private  do 

Total  for  Construction 

APPENDIX  E 


JOHN   E-   HUDSON,   President. 
WM.   R.   DRIVER,  Treasurer. 


SUBJECT— Accounts. 


The  American  Bell  Telephone  Company, 


No.  95  Milk  Street. 

p.  O.  DRAWER  2. 


Boston,  January  i,  1891 
Company, 


Gentlemen, —  We  present  herewith  the  outline  for  a  system  of  accounts,  containing  such 
modifications  of  the  plan  proposed  in  our  circulars  of  April  25,  1884,  and  December  30,  1887,  as 
seem  advisable,  in  view  of  changes  which  have  been  made  both  in  methods  of  construction  and  of 
operating  the  telephone  business,  and  the  greater  or  less  prominence  which  the  experience  of  past 
years  has  shown  to  attach  to  certain  branches  of  the  service. 

In  framing  this  system  of  accounts,  the  objects  which  have  been  kept  in  view  are :  — 

First.  That  the  books  may  be  made  to  contain  in  themselves  a  complete  and  clear  record 
of  all  the  financial  transactions  of  a  company,  in  such  form  that  any  competent  accountant  can 
readily  trace  each  item  from  its  first  entry  upon  the  books  to  its  final  place  in  the  proper  ledger 
account,  or  reverse  the  process  ;  and  that  the  books  shall  afford  the  means  of  verifying  easily,  and 
with  the  utmost  certainty  attainable,  the  accuracy  both  of  the  accounting  and  the  money  depart- 
ments. 

Second.  That  from  the  book  accounts,  statements  can  be  made  up  without  difficulty,  show- 
ing, at  the  close  of  any  month,  the  property  of  the  Company,  its  liabilities,  and  the  results  of  the 
business,  either  in  condensed  form  or  with  such  analysis  and  detail  as  may  be  desired.  With  a 
proper  classification,  the  monthly  trial  balances  will  present  the  accounts  in  such  form  that  a  com- 
parison of  successive  sheets  will  afford  a  reasonably  accurate  history  of  the  business,  month  by 
month,  show  the  increase  or  decrease  of  different  kinds  of  property  or  obligations,  and  draw  atten- 
tion to  unusual  amounts  in  any  of  the  principal  classes  of  earnings  or  expenses. 

Thirp.  That  the  method  should  be  simple  and  direct,  requiring  no  unnecessary  expenditure 
of  time  and  labor,  adapted  to  the  needs  of  all  the  companies  operating  the  various  branches  of  the 
telephone  business,  whether  employing  a  large  and  thoroughly  organized  force  of  accountants  or 
otherwise ;  and  that  its  adoption  may  be  productive  of  such  uniformity  in  the  accounts  of  the 
several  companies  as  will  afford  the  best  facilities  for  the  comparison  of  results. 

We  have  aimed  to  make  the  classification  of  accounts  such  as  best  to  express,  under  the  respec- 
tive titles,  the  actual  character  of  the  properties,  liabilities,  or  operations  which  they  are  designed 
to  represent. 


All  the  accounts  may  be  grouped  under  four  heads  : 

I.   ASSETS,  2.   LIABILITIES  —  direct  and  contingent, 

3.   EXPENSES,  4.   EARNINGS.     (Working  Accounts), 

or  finally  under  the  two  classes  first  named,  the  difference  between  all  expenses  and  earnings, 
after  deducting  dividends,  falling  into  the  surplus  or  revenue  balance  account.  If  the  balance 
stands  on  the  credit  side,  it  is  to  be  regarded  as  a  liability  to  the  stockholders  ;  if  on  the  debit 
side,  as  a  claim  against  them,  to  be  met  by  assessment,  contribution,  or  future  earnings. 

We  believe  the  following  list  of  ledger  accounts,  with  the  few  additional  ones  which  cer-r 
tain  companies  find  necessary  to  represent  special  classes  of  property  or  transactions,  will  meet 
the  requirements  of  the  business:  — 


ASSETS. 

I.     Franchise. 
II.    Construction  — 

(i)  Exchange  Aerial. 

(2)  Underground  Conduits. 

(3)  Underground  Cables. 

(4)  Equipment. 

(5)  Toll  Lines. 


I. 

II. 
III. 
IV. 

V. 


III. 

Supply  Department. 

IV. 

Real  Estate. 

V. 

Stocks  and  Bonds. 

VI. 

Accounts  Receivable. 

VL 

VII. 

Cash. 

EXPENSE  ACCOUNTS. 

I. 

General  — 

I. 

(i)  Salaries-and  Wages. 

IL 

(2)  Rent,  Light,  and  Heat. 

in. 

(3)  Travelling. 

IV. 

(4)  Postage,  Printing,  and  Stationery. 

V. 

(5)  Taxes. 

VL 

(6)  Legal. 

VIL 

(7)  Incidental. 

IL 

Operating  — 

(i)  Salaries  and  Wages. 

(2)  Rent,  Light,  and  He'at. 

(3)  Incidental. 

III. 

Maintenance — 
(i)  Salaries  and  Wages. 
(2)  Rent,  Light,  and  Heat. 
<3)  Material. 

(4)  Travelling. 

(5)  Conduit,  Pole,  and  Roof  Rent. 

LIABILITIES. 

Capital  Stock. 

Surplus. 

Bonded  Debt. 

Real  Estate  Mortgage  Notes. 

Reserve — 

(i)  For  Unearned  Rentals. 

<2)  For  Outstanding  Toll  Tickets. 

(3)  For  Maintenance. 

(4)  For  Taxes. 

(5)  For  Accrued  Interest. 
Bills  and  Accounts  Payable. 


REVENUE  ACCOUNTS. 

Exchange  Service. 

Toll  Service. 

Private  Line. 

Messenger. 

Real  Estate  Revenue. 

Dividends  and  Interest. 

Miscellaneous. 


(6)  Insurance. 

(7)  Damage  and  Compensation. 
*(8)  Incidental. 

rV.    Rental  and  Royalty — 

(i)  Instrument  Rental,  A.  B,  T.  Co.,  Exchange. 

(2)  «  •"  "        *'  ,  Private  Line. 

(3)  Proportion  to  A.  B.  .T.  Co.  of  Extra-territorial  Receipts. 

(4)  "  "  "     *'    Telegraph  Commissions. 

(5)  Switch-Board  Royalty. 
V.    Private  Line  Expense, 

VI.    Messenger  Expense. 
VII.     Real  EstAte  Expense. 
VIII.     Interest. 

IX.    Miscellaneous  Expense. 

DIVIDEND  ACCOUNT.. 

The  above  grouping  of  the  accounts  is  intended  to  be  such  that  the  earnings  and  expenses 
which  pertain  to  the  actual  operation  of  the  telephone  service  may  be  readily  separated  from  other 
revenues  and  expenditures  of  the. Company,  and  that  analysis  of  the  accounts  can  conveniently  be 
made  to  determine  with  a  close  approach  to  accuracy,  the  revenue,  and  the  cost  in  detail  of 
operating,  by  stations. 


THE    LIABILITY    ACCOUNTS. 

1.  The  Capital  Stock  Account  should  represent  the  actual  issued  capital. 
II.  Surplus  should  show  the  undivided  net  revenue  of  previous  years.  We  advise  that  the 
Surplus  account  be  not  credited  or  charged  direct  with  items  of  Earnings  and 
Expense,  or  so-called  Profit  and  Loss,  but  that  all  such  items  be  passed  through  the 
Revenue  and  Expense  accounts  of  the  current  year,  even  though  there  be  some  of 
them  which  pertain  to  business  of  an  earlier  date,  but  which  could  not,  with  due  care, 
be  ascertained  and  carried  into  the  accounts  of  said  date.  The  Earnings,  Expense, 
and  Dividend  accounts  will  thus  furnish  the  key  to  all  changes  in  the  Surplus  account, 
the  only  exception  being  in  case  of  action  of  the  Directors,  which  would  be  of  record, 
authorizing,  for  some  special  reason,  a  charge-off  from  the  Surplus. 

III.  Bonded  Debt,  the  indebtedness  of  the  Company,  the  evidences  of  which,  held  by  creditors, 

are  in  the  form  commonly  known  as  Mortgage  Bonds  or  Debenture  Bonds. 

IV.  Real  Estate  Mortgage  Notes. 

V.  Reserves.  First,  —  For  Unearned  Rentals.  When  bills  are  sent  out  for  quarterly, 
semi-annual,  or  annual  rentals  or  exchange  service,  Accounts  Receivable  should 
be  charged  with  the  amount  of  the  bills,  and  Earnings  credited  with  one  month's 
proportion  of  the  amount,  the  Reserve  for  Unearned  Rentals  being  credited  with 
the  remainder ;  at  the  beginning  of  each  successive  month  the  latter  account  should 
be  charged,  and  Earnings  credited,  with  that  month's  proportion.  As  the  bills 
are   paid,  Cash  is  debited  and  leconnt  Receivable  credited. 


Second,  —  For  Oatstaading  Toll  Tickets.  When  tickets  are  sold,  this  account 
should  be  credited  with  the  amount  which  such  tickets  represent  in  service  to  be 
rendered.  At  the  end  of  each  month,  the  account  should  be  charged  with  the 
amount  of  tickets  redeemed  within  the  month,  which  amount  constitutes  part  of  the 
credit  to  Earnings. 

Third,— Yox  Maintenance.  A  fixed  amount  having  been  appropriated  for  Mainten- 
ance of  the  property  during  the  financial  year,  it  is  recommended,  for  the  purpose 
of  equalizing  the  monthly  expenses,  that  one  twelfth  of  the  amount  should  be  charged 
up  each  month  as  Maintenance  expense.  The  Reserre  for  Maintenance  account 
should  represent  the  amount  which,  at  the  close  of  any  month,  remains  unexpended, 
under  the  classified  Maintenance  accounts,  of  the  amount  so  charged  up  for  the 
months  which  have  elapsed. 

Fourth, —  For  Taxes.  The  balance  of  Taxes  unpaid  at  the  end  of  any  month, 
of  the  proportion  of  estimated  yearly  taxes  charged  up  in  the  same  manner  as  above. 

Fifth, —  For  Accrued  Interestt  The  amount  of  interest  which,  at  the  end  of  any 
month,  has  actually  accrued  upon  the  indebtedness  of  the  Company,  but  which  has  not 
then  become  payable. 

VI.     Bills  and  Accounts  Payable.     Dues  of  the  Company  upon  open  accounts,  or  for 
which  ordinary  notes  of  hand  have  been  given: 


THE    ASSET    ACCOUNTS. 

I.  Franchise. 

II.  Construction  should  represent  the  cost  of  the  plant,  whether  purchased  or  built  by  the 

Company's  force. 

Of  the  several  sub-divisions, — 

Firsts — Exchange  Aerial  should  include  the  cost  of  poles,  house-top  fixtures, 
aerial  cables  and  wires,  with  the  usual  outside  connections,  employed  in'  conducting 
the  Exchange  work. 

Second,—  Underground  Conduits. 

Third, —  Underground  Cables. 

Fourth, —  Equipment  should  include  cost  of  switchboards,  with  the  necessary 

appliances,  within  the  operating  rooms,  connected  therewith,  bells  and  batteries  in 
use,  and  furniture. 

Fi/tJi, —  Toll  Lines,  the  cost  of  lines  used  in  operating  the  Toll  and  Extra- 
Territorial  service. 

The  salaries  of  officers  employed  expressly  to  superintend  the  work  of  making  extensions  of. 
the  plant ;  the  wages  of  foremen  and  laborers  engaged  upon  such  work  ;  the  travelling  and  inci- 
dental expenses  of  these  employees  while  so  engaged ;  the  rent,  light,  and  heat  of  rooms  assigned 
to  the  construction  force;  and  the  cost  .of  material,  with  the  storage,  freight,  and  teaming  thereon, 
used  upon  the  work,  constitute  the  items  properly  chargeable  to  Construction.  If  the  work  is  done 
under  contract,  the  contract  price,  should  be  charged  upon  the  books. 


In  case  of  the  rebuilding  of  an  exchange  or  line,  of  change  from  house-top  to  pole  lines,  or  from 
overhead  to  underground  construction,  the  substitution  of  cables  for  separate  wires,  or,  in  general, 
such  change  of  plant  or  apparatus  as  replaces  an  inferior  system  with  one  affording  better  facilities^ 
it  is  evident  that  the  addition  to  the  Construction  accounts  should  be  only  the  amount  by  which  the 
cost  of  the  new  work  exceeds  that  of  the  old.  If  the  new  work  is  of  the  same  class  of  Construction 
as  the  old,  as,  for  example,  in  case  of  the  rebuilding  of  an  aerial  line,  a  due  proportion  of  the 
several  items  of  cost;  sufficient  in  the  aggregate  to  cover  the  cost  of  the  old  work,  less  the  value  of 
the  old  material  used  upon  the  new  work  or  turned  in  to  the  Supply  Department,  should  be  charged 
direct  to  the  several  Maintenance  accounts. 

If,  however,  the  new  work  would  come  under  a  different  class  of  Construction  from  the  old, 
as  in  the  case  of  replacing  a  part  of  the  overhead  system  by  underground  conduits  and  cables, 
Construction  of  the  proper  class  should  be  charged  with  the  entire  cost  of  the  new  work,  and 
credit  made  to  the  old  Construction  account  through  the  Reserve  for  Maintenance  account. 

It  is  recommended  that  the  several  classes  of  new  construction,  as  above  indicated,  be  car- 
ried upon  the  books  during  the  course  of  each  financial  year,  and  at  the  close  of  the  year  be  carried 
into  the  general  Construction  account.  It  is  also  recommended  that  a  supplementary  book  be 
kept,  in  which  shall  be  entered  in  detail  the  cost  of  each  piece  of  Construction  work  under  the 
proper  classification  as  to  its  character  and  location. 

III.  Supply  Department  Account.  In  this  account  should  be  carried  the  cost  of  Tools, 
and  Teams,  as  well  as  Supplies  not  issued  for  construction  or  maintenance,  with  freight  and  teaming 
thereon. 

IV.  Real  Estate.     The  cost  of  investments  in  land  and  buildings. 

V.     Stocks  and  Bonds.     Securities  of  other  companies  owned  by  the  Company. 
VI.     Accounts   Receivable.     Uncollected  dues  as  shown  by  the  Subscribers'  ledger,  and 
total  of  debtor  personal  accounts  on  the  general  ledger. 

VII.     Cash.     Money  on  deposit  in  banks  and  cash  in  the  hands  of  the  Treasurer. 

THE    REVENUE    ACCOUNTS. 


I.     Exchange  Service  should  include   Subscribers'   Rentals,   Pay  Station   Local  Tolls, 
Telegraph  Commissions,  and  Terminal  Chargfes  (upon  Extra-Territorial  business). 

II.     Toll  Service.     Charges  for  service  over  all  Toll  and  Extra-Territorial  lines. 

III.  Private   Line.     Rentals  upon  leased  instruments  for  Private   Line,   Club  Line,  and 
Speaking  Tube  use,  also  charges  for  use  and  care  of  lines,  bells,  and  batteries  connected  therewith. 

IV.  Messenger.    Revenue  from  District  Messenger  department  or  other  Messenger  service. 
V.     Real  Estate  Revenue.     All  revenue  from  Real  Estate  owned  by  the  Company,  in- 

eluding  computed  rent  for  the  portions  of  such  real  estate  occupied  for  the  business  of  the  Company 
VI.     Dividends  and  Interest. 
VII.     Miscellaneous.    Profit  on  Sales  or  Job  Work,  and  such  other  items  of  revenue,  of 
small  amount,  as  cannot  properly  be  credited  to  one  of  the  above  classes  of  revenue. 

THE    EXPENSE    ACCOUNTS. 

This  classification  is  designed  to  avoid,  so  far  as  it  can  reasonably  be  done,  the  apportionment 
of  any  single  item  of  salary,  wages,  or  expenses  among  two  or  more  classes  of  expense  ;  and  to  pro- 

S 


vide  for  charging  to  construction  and  other  property  accounts,  only  such  items  as  can  be  distinctly 
shown  to  represent  expenditures  for  extension  of  the  property. 

L  General  Expense.  /^rr.f/,— Salaries  and  Wages.  This  account  should  include  the  sala- 
ries of  the  President,  Vice-President,  General  Manager,  and  their  office  force ; 
Treasurer  and  office  force ;  Secretary,  Auditor,  and  their  office  force ;  Attorney 
regularly  employed  ;  Engineer  and  Electrician  regularly  employed ;  Division  Superin- 
tendents and  their  clerks. 

Second,—  Rent,  Light,  and  Heat.  The  Rent,  Light,  Heat,  and  Care  of  the  offices 
occupied  by  the  above  named  officers  and  employees. 

Third, —  Travelling.  Travelling  expenses  of  these  officers  and  employees  while 
engaged  upon  the  general  business  of  the  Company. 

/v«^///,— Postage,  Printing,  and  Stationery.  Cost  of  books,  blanks,  printing, 
stationery  and  postage  for  the  use  of  all  departments  of  the  Company. 

Fifth, —  Taxes.     All  Taxes  except  those  on  Real  Estate. 

Sixth, — Legal  Expenses.  Charges  of  Attorneys  employed  for  special  work,  and 
compensation  paid  upon  claims  for  personal  injury,  either  upon  judgments  or  by 
compromise. 

Seventh, —  Incidental.  Items  of  small  amount  pertaining  tothe  general  offices, 
which  cannot  otherwise  be  properly  classified.  Under  this  head  may  be  classed 
premiums  upon  officers'  bonds. 

II,  Operating.     /^r>J/,— Salaries  and  Wages    should   include  the  salaries  and   wages  of 

Exchange  Managers,  Operators,  Collectors,  Canvassers,  Exchange  Clerks,  and  others 
employed  under  direction  of  the  Exchange  Manager,  except  those  expressly  assigned 
to  Construction  work,  and  those  named  in  III.,  V.,  VI.,  and  VII.  of  this  expense  classi- 
fication. If  a  separate  Private  Line  force  is  employed,  salaries  and  expenses  of  that 
force  are  to  be  charged  to  Private  Line  Expense. 

Second,— ^^vX,  Light,  and  Heat.  The  Rent,  Light,  Heat,  and  Care  of  space 
occupied  by  the  officers  and  employees  above  named. 

Third,—  Incidental. 

III.  Maintenance.     First, —  Salaries  and  Wages.    The   Salaries  of  the  Superintendent  of 

Construction  and  his  assistants,  arfd  the  Assistant  Engineers,  when  employed  upon 
other  than  new  work  \  the  Assistant  Electricians ;  the  Supply  Agent  and  his 
assistants ;  and  the  pay  of  Foremen,  Linemen,  Inspectors,  and  Laborers  engaged 
upon  the  maintenance  and  reconstruction  of  the  lines  and  other  operating  property. 

If  a  separate  Private  Line  force  is  employed,  the  salaries  and  expenses  of  that 
force,  as  well  as  cost  of  Private  Line  Maintenance  Material,  should  be  charged  to 
Private  Line  Expense. 

Second, — Rent,  Light,  and  Heat.  The  Rent,  Light,  Heat,  and  Care  of  space 
assigned  to  the  use  of  the  Maintenance  force,  or  for  storage  of  Maintenance  material 
and  tools. 

Third, —  Material.  Material  used  upon  Maintenance,  including  battery  supplies, 
and  the  freight,  teaming,  and  express  upon  the  same. 

6 


Fourth, — Travelling,  The  Travellihg  expense  of  officers  and  employees,  when 
engaged  upon  the  maintenance  and  rebuilding  of  the  lines  or  other  operating 
property. 

/"(/?/^— Conduit,  Pole,  and  Roof  Rent. 

Sixth, —  Insurance.  Premiums  paid  for  insurance  upon  all  property,  except  real 
estate. 

Seventh, —  Damage  and  Compensation.    Compensation  for  injury  to  property  of 
others  caused  by  its  occupancy  for  the  support  of  fixtures,  or  for  other  uses  of  the 
Company,  or  by  accident  due  to  the  employees  or  property  of  the  Company. 
Eighth, —  Incidental. 
The  experience  of  past  years  will  enable  the  Directors  of  most  of  the  Companies  to  estimate, 
with  approximate  accuracy,  the  amount  which  should  be  expended  during  the  year  which  is  to 
follow,  in  maintaining  the  construction  in  effective  condition,  including  the  cost  of  the  property 
which  should  be  replaced,  in  the  process  of  improvement  and  reconstruction. 

We  recommend  that,  at  the  beginning  of  each  financial  year,  an  amount  sufficient  to  cover  all 
siich  expense  be  appropriated  for  Maintenance  during  the  year,  and  that  each  month  one  twelfth  of 
the  amount  be  charged  up  in  the  expenses,  under  the  head  of  Maintenance,  for  the  purpose  of 
equalizing  the  monthly  expenses. 

If  the  amount  shown  upon  the  Maintenance  vouchers,  together  with  cost  of  Material  charged 
from  the  Supply  Department  account  against  Maintenance  should  not,  at  the  close  of  any  month, 
equal  the  proportionate  part  of  the  annual  appropriation  corresponding  to  the  portion  of  the  year 
which  has  elapsed,  an  entry  should  be  made  through  the  journal  charging  Maintenance,  and 
crediting  Reserve  for  Maintenance,  with  the  unexpended  balance  of  the  amount  chargeable  to 
that  time.  Thus,  if  twelve  thousand  dollars  be  fixed  as  the  yearly  appropriation  for  Maintenance 
for  the  year  beginning  January  ist,  and  at  the  end  of  June  five  thousand  dollars  has  been  expended 
for  that  account,  six  thousand  dollars  would  stand  charged  up  as  Maintenance  Expense,  one 
thousand  standing  to  the  credit  of  Maintenance  Reserve. 

For  the  same  purpose  of  equalizing  monthly  expenses,  we  recommend  that  State  Taxes  be 
apportioned  in  the  same  way  equally  to  the  several  months,  and  the  difference  between  the  amount 
apportioned  and  paid,  at  the  close  of  any  month,  be  carried  in  reserve,  the  necessary  adjustment 
to  Be  made  when  the  accounts  are  closed  at  the  end  of  the  year. 

Interest  upon  the  indebtedness  of  the  Company  should  be  charged  up  in  the  Interest  expense 
account,  as  it  accrues,  and  the  balance  charged  up,  but  not  payable,  at  the  close  of  any  month, 
carried  in  Reserve. 

IV.  Rental  and  Royalty.    .F«Vj/,— Instrument  Rental,  American  Bell  Telephone  Co., 

Exchange.     Amount  of   Rental  on   Exchange    Instruments,  after  credits  made  on 
account  of  Rental  Concessions. 

Second, —  Instrument  Rental,  A.  B.  T.  Co.,  Private  Line.  This  should  include 
the  Rental  on  Private  Line,  Club  Line,  and  Speaking  Tube  instruments. 

77//>^,_  Proportion  to  A.  B.  T.  Co.  of  Extra-territorial  Receipts, 
•^^^//r//^,— Proportion  to  A.  B.  T.  Co.  of  Telegraph  Commissions. 

Fifth,—  Switch  -  Board  Royalty. 

V.  Private  Line  Expense.     Salaries,  Wages,  and  incidental  expenses  of  officers  and  others 

employed  in  the  care  of  Private  Lines,  or  the  conduct  of  the  Private  Line  branch  of 
the  business,  and  cost  of  material  used  in  maintenance  of  those  lines. 


VI.  Messenger  Expense.     Expenses  of  District  Messenger  Department,  or  other  messenger 

service. 

VII.  Real   Estate   Expense.     AIL  expense  for  care  of   Real  Estate,  Repairs,  Insurance 

premiums  and  Taxes  thereon. 

VIII.  Interest.      Interest  on  Bonded  Debt,  Real   Estate  Mortgage  Notes,  or  other  in- 

debtedness. 

IX.  Miscellaneous  Expense.      Other  items  of  expense  of   small  amount,  which  cannot 

readily  be  charged  in  any  of  the  above  classes. 

We  advise  that  Rebates  of  uncollectible  accounts  be  charged  up  through  the  Journal  against 
General  Incidental  expense ;  and  that  Rebates  allowed  for  any  other  reason  be,  as  a  convenient 
disposition  of  the  same,  charged  up  as  Maintenance  Incidental  expense.. 

In  addition  to  the  Construction  Record  Book,  to  which  we  have  referred,  a  Subscribers*  Ledger,. 
Expenditure  Distribution  Book,  and  several  other  auxiliary  books,  can  be  used  to  advantage  and 
with  a  saving  of  much  unnecessary  work  u'pon  the  Journal  and  Ledger. 

We  are  having  a  supply  of  the  Expenditure  Distribution  books  made,  which  will  provide  for 
the  classification,  of  charges  which  we  have  suggested.  On  January  15  we  expect  to  forward  you 
one  of  these  books,  and  shall  esteem  it  a  favor  if  you  will  put  it  in  use. 

It  is  a  recognized  fact  that  the  conditions  which  obtain  in  the  large  cities  are  such  as  to 
render  the  cost  of  operating  the  telephone  exchange  service,  in  those  places,  materially  larger  than 
the  cost  of  giving  the  same  class  of  service  in  the  smaller  places. 

In  undertaking,  therefore,  to  make  an  analysis  of  the  average  earnings  and  expenses  by 
stations,  and  to  ascertain  the  returns  upon  the  Company's  investment  at  different  points,  the 
importance  of  sub-dividing  the  accounts,  so  as  to  show  the  results  of  the  business  in  the  exchanges 
severally,  distributed  under  the  various  headings,  is  obvious. 

With  the  aid  of  proper  returns  and  vouchers  from  the  exchange  managers,  the  accounts  may 
be  made  to  show  these  results,  without  any  considerable  addition  to  the  work  of  the  accounting 
department. 

To  make  such  statements  complete,  it  is  necessary  to  apportion  the  General  Expenses,  and 
some  other  items  which  cannot  be  localized,  upon  an  arbitrary  basis.  We. regard  it  as  the  correct* 
practice  to  apportion  these  expenses  upon  the  basis  of  Gross  Telephone  Earnings  of  the  respeotive 
exchanges,^  and  we  recommend  that  this  practice  be  adopted. 

We  shall  esteem  it  a  favor  if  you  will  make  such  changes  in  your  system  of  accounts  for  the 
present  year,  as  will  bring  them  into  conformity  with  the  plan  which  we  have  outlined  herein. 

If  there  are  any  features  of  the  plan  which  have  not  been  clearly  presented,  please  advise  us 
at  your  early  convenience,  and  we  shall  be  glad  to  furnish  the  desired  explanation. 


Yours  very  respectfully, 


Auditor, 


APPENDIX  F 


FORM  FOR  CONDENSED  TRIAL  BALANCE 

AND     STATEMENT     OF    BUSINESS— 

SUBSTANTIALLY  AS  USED  FROM 

ABOUT  1891  to  1908. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


'4     'sYRACDSt,  -  IJ.V. 


^q^^'5 


/  ; 


UNIVERSITY  OF  CAUFORNIA  I^IBRARY 


»Si 


